3 steps to deal with market volatility

By Beth Braverman

The past few weeks have served as a stark reminder that stocks can be volatile, sometimes extremely.

The S&P 500 fell more than 5% in January, its worst performance since the start of the pandemic, and markets remained choppy in the first two weeks from February. Experts expect volatility to continue, amid concerns about inflation and rising interest rates, geopolitical uncertainty and the ongoing pandemic.

“There are a lot of headwinds,” said Craig Ferrantino, founder of Craig James Financial Services in Melville, New York. “Some of them are temporary, but others could take a long time to disappear. There is a lot of economic uncertainty. »

Market volatility can be a good thing for medium-dollar, long-term investors — meaning they contribute steadily to their investment accounts over time — because it allows them to hedge their risk by buying actions to both highs and lows, smoothing the Return.

But recent market performance has some investors worried about a potential correction, in which the market would fall 10% or more from recent highs.

“For the average retirement investor who doesn’t have an advisor reminding them during bull cycles that there’s going to be a correction, it can be a scary time,” said Deborah Meyer, certified financial planner and CEO of WorthyNest. . “This is especially true for you millennials who have never experienced a stock market crash before.”

If you’re worried about your investments, take a deep breath, then follow these steps:

1. Withdraw the money you need in the short term from the market

Experts advise against keeping the money you’ll need for the next five years (or sooner) entirely out of the stock market and transferring it to safer investments like a high-yield savings account or a Money Market. This includes your emergency fund, as well as money you’ve set aside for short-term goals like a down payment on a house, renovations, or a wedding.

If you are retired or nearing retirement and plan to dip into your wallet for living expenses, consider withdrawing up to two years of stock market expenses.

“As long as you know your cash needs are being met, you can let your portfolio do its thing and you’ll weather any potential recession,” said Nancy Hetrick, founder and CEO of Smarter Financial Solutions.

2. Stick to your longer-term investment plan

For longer-term investments, remember why you’re saving. If you’re putting money aside for a retirement decades away, say, or for your toddler’s college tuition, you have plenty of time for your investments to recover from a downturn or even a downturn. ‘a correction.

The reason most advisors recommend that long-term investors keep most of their money in a diversified portfolio with a heavy equity allocation is that volatility and short-term risk allow for higher returns over time. time. But you need to determine which allocation is best for you based on your time horizon and personal risk tolerance.

“Even the biggest companies can’t time the market in the short term,” said Anthony Mezzasalma, Certified Financial Planner at Mezzasalma Advisors. “The way around that is to have a plan and make sure the money we’re taking risks with is invested for the long term.”

Having a pre-determined asset allocation (and determining what circumstances would warrant you making changes to it) helps you avoid making emotional decisions about your investments when volatility hits. The longer you can stay invested in the market, the more time you will have for your investment gains to accrue, negating the impact of daily market movements.

3. Make sure you have realistic expectations

Even with the short bear market that hit at the start of the pandemic, investors have seen record performances in recent years. The S&P 500 is up nearly 60% over the past three years.

It’s easy to forget that historically, annual returns hover closer to 10% and bear markets (pulls of 20% or more) hit on average once every two or three years. This means that it is unrealistic to expect your investments to continue performing as they have for the past three years.

“Even though you know volatility is normal, it can be a very visceral experience when we watch our wealth disappear,” said Donald Calcagni, chief investment officer at Mercer Advisors. “But it comes down to having a plan and sticking to it.”

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