personal finance | january 19, 2021
How to Help Preserve Your Portfolio During Volatile Markets
Making large investment changes in response to a market downturn can hurt your portfolio’s performance in the long run. Consider these four ways to be better prepared when market volatility hits.
Thoughtful planning can help you feel more secure in times of market volatility.
You can’t control the market, but you can control how you prepare and react, no matter your current circumstances.
Evaluate your options, knowing that you may need to be more flexible about your future plans should the market turn.
Judith Ward, CFP®
Senior Financial Planner
Making impulsive investment decisions amid a market downturn is never a recipe for success. Planning ahead, being patient, and considering smaller adjustments along the way can help keep your financial goals on track. During times of market volatility, it’s important to focus on the things you can control.
Here are four of them:
1. Asset Allocation:
You may not be able to control the markets, but you can control your asset allocation. Stocks have the most growth potential over the long term, but they are also more affected by short-term volatility. When you’re in your 20s, 30s, or even 40s, you have time on your side, which will allow you to withstand and bounce back from volatility. A portfolio that’s 80% to 100% stocks could be reasonable. As you get closer to retirement, you should start to introduce more bonds into the mix. Bonds provide a buffer to dampen short-term market fluctuations, resulting in a more balanced investment approach.
The key consideration when determining your asset allocation is how your investment mix will impact your lifestyle in the near term. Some people may become complacent when markets are doing well and, without rebalancing, might find an overallocation to stocks. Consider, though, in 2008, a portfolio of 100% stocks was down almost 40% for the year. And a portfolio that was 80% stocks and 20% bonds was down about 30% that year.*
Ask yourself: If my portfolio value dropped significantly today, would it impact my current lifestyle? The answer to this question can help you put together an appropriate asset allocation for your circumstances. For example, for those with many years until retirement, that answer may be “no.” For those closer to or in retirement, a significant drop could be concerning, and you might need to pull back on stocks and add bonds to your portfolio.
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Sample Asset Allocations By Age
In evaluating equity exposure, consider other assets, income, and investments (e.g., equity in a home, Social Security benefits, individual retirement plan investments, savings accounts, and interests in other qualified and nonqualified plans) in addition to interests in a particular plan or IRA.
The allocation pie charts above are age-based only and do not account for your personal circumstances.
2. Saving and Spending:
Another factor you can control is how much you’re saving and spending. When you’re in the earlier stages of saving for retirement, a market downturn can be your friend. Continue investing as much as you’re able to—you’re buying shares at lower prices. This may require some discipline and patience, however, as historically it has taken three to five years for stocks to recover from a bear market. Automating contributions can help you keep your savings on track by reducing the likelihood that you’ll make sudden changes in response to market conditions.
If you’re planning to retire soon or are already in retirement, your spending is a powerful lever that can help you weather a down market. Small spending adjustments could garner a large payoff. Assess your budget and determine where you might be able to cut expenses or put off larger purchases should the markets misbehave.
3. Cash Contingency:
Another thing you might want to consider is the idea of a contingency—starting to build up some money on the side. For those in the workforce, we typically suggest an amount that’s equal to three to six months of your expenses. Think of it as your personal safety net. Should you lose your job or come upon unbudgeted expenses, you won’t have to raid your retirement savings or rack up credit card debt to make ends meet.
Retirees may view their needs for available cash differently. A cash contingency could be used as an alternative to fund living expenses if there is an extended down market. You can draw from this account instead of having to sell investments at an inopportune time, locking in a loss. Considering that a 60% stock/40% bond portfolio recovered within two years during the last two bear markets, it may be reasonable for retirees to have one to two years of living expenses in a contingent cash account.
4. Flexibility and Preparation:
It’s important to consider all your options and think of ways in which you’re willing to be more flexible. Should the market turn and you’d planned to retire, could you continue to work for a couple more years? If newly retired, could you find part-time work to supplement your income? And, if the downturn was strong and sustained, leading to a weak economic environment, would you be prepared if you were to lose your job? For all these reasons, you should keep up with your connections, continue to build a network, and refresh your resume.
We might not know when a downturn may occur or how long it may persist, but having a plan in place and being willing to make small adjustments can help you maintain control and manage your finances through these periods of uncertainty.
*Stocks are represented by the S&P 500 Index. Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index.
All investments involve risk, including possible loss of principal.
This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.
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