When you’re heavily invested in the market and looking forward to retirement or other goals, volatility can be nerve-wracking. But it’s important to remember that periods of volatility can bring opportunities as well as risks. Having a strategic investment plan in place and using available resources to make informed decisions about your financial future may help you feel more confident during uncertain times.
Fortunately, in 2016, the market — despite what you may have read or heard — was relatively stable, with stocks performing well overall, says Sameer Samana, CFA, Global Quantitative Strategist at Wells Fargo Investment Institute (WFII). However, the steady year was punctuated by a few episodes of volatility, he notes: In February, for example, the market fell 14% as a result of concerns about China and the possibility of an additional Federal Reserve interest rate hike. And the market tumbled again in June briefly after the U.K. Brexit vote.
Based on its research and analysis, WFII predicts even more market fluctuations in coming years.
“From 2009 to 2014 or so, we were really insulated from volatility because any time the markets fell or economic growth slowed, central banks took action — the Fed would buy bonds, lower interest rates, etc.,” Samana says. “Now that we’re later in the economic cycle, we’re going to see a different policy. If you’re an investor, it’s time to change your assumptions about the market.”
Here are a few tips to keep in mind during times of volatility:
Stick to your plan
When the market gets choppy, investors often have an emotional reaction and want to pull out of the market to try to avoid loss, says Tracie McMillion, CFA, Head of Global Asset Allocation Strategy for WFII. Try to remember that moving or selling investments during a market decline will only lock in the loss; staying invested may allow you to benefit when the market comes back.
“Your plan should include an assessment of the amount of risk you feel like you can take within your portfolio,” she says. “Try to keep in mind that you have a cycle or two or more to ride through the volatility.” If you haven’t updated your plan in a while, set up a meeting with your Financial Advisor to discuss your goals and make sure you are still comfortable with the amount of risk you’re taking.
Consider your time horizon
If you’re going to need the money in a year or two to pay for college or a home purchase, don’t put it into the stock market. Short-term needs are where volatility can hurt you the most because you don’t have time to recover from any downturns. “If you can focus on the long term, that will give you a competitive advantage in a volatile market,” Samana says.