With the anticipated tariffs and their possible repercussions, our country is experiencing a lot of economic uncertainty. That uncertainty has elicited a volatile stock market, and with market fluctuations often comes fear.
Investors see the pullbacks and ask, “Is now the time to get out of the market? Is it going to crash? Will I lose my money?”
It’s natural to ask these questions, but it’s also important to step back and look at the bigger picture. When you look at market volatility through the lens of a long-term financial plan, it loses some of its intimidation factor. Because financial planning is all about strategically preparing for life’s unexpected (and expected) moments. It helps you protect your financial wellbeing at each stage of life so you don’t have to worry when the world seems out of control.
So, to kick off our Quarterly Commentary, we’re going to explore how you can navigate market volatility with the help of a financial plan.
The reality is, everything that’s happening in the stock market today is par for the course. When we invest money in the market, we don’t expect it to ride a straight line up and to the right. Markets have pullbacks, and we take this into consideration when we create financial plans. They also have recovery periods—it’s a cycle that has repeated time and time again throughout history.
This is important to remember when you’re tempted to pull out of the market because things look grim. You don’t lose money when the market drops; you lose money when you withdraw from the game at the wrong time.
I saw a quote recently describing the state of the market and how it can be scary to invest in “times like these,” how a new president impacts the market, etc.… It seemed very timely and relevant. The interesting part, though, was that the quote was from nearly 40 years ago. This just reinforces the fact that we’ve been here before. It’s not—despite what you may hear in the news—unprecedented territory. And because of that, we know how to prepare for “times like these.”
When we create a financial plan, we assess the client’s goals, risk tolerance, and timeline and design their plan accordingly. Typically, that means we allocate a portion of their assets to fixed solutions like CDs, money markets, or annuities, and the rest to the market. The fixed solutions allow for short-term liquidity and security, while investing in the market is an opportunity to make more money—the risks are greater, but so are the potential rewards. It’s a strategic balance based on each person’s situation.
So if you’re closer to or in retirement and have less time to recover from a potential dip in the market, you would have more of your assets allocated to fixed solutions. We also recommend retirees have a cash reserve of one-to-two years’ worth of expenses—this is essentially an emergency fund for retirement, and one of the ways you can prepare for these seasons of uncertainty. On the other hand, we typically advise investors who are still 5 years or longer from retirement to allocate more of their money to the market because it’s their best chance to grow their savings.
When investors ask, “Should I move out of the market?” during times of volatility, they are looking at the circumstance to determine their course of action. This is unconstructive for two reasons. The first is that an effective financial plan is built around your goals, not what’s going on in the market. The second is the reason for the first—it’s impossible to anticipate every movement in the stock market. So to build a plan around unknown and volatile variables is futile. Instead, your plan—and consequently, your financial decisions—should be grounded in your needs and goals, not what’s going on in the market.
When you stick to a plan like that through volatile times, you come out the other side still on track for your goals.
That’s why it’s important to partner with a professional who can guide you through the planning process with your values and priorities in mind. They’ll make sure you’re prepared for each season of life (and the market) and remind you why you’re doing what you’re doing.
On the other hand, when you don’t have a plan or someone to guide you through the investment process, it’s all too easy to make emotional, reactive decisions based on what’s happening around you—and unfortunately, those kinds of decisions don’t typically lead to your goals.
So, if you have a long-term financial plan that has been constructed around your goals, now is the crucial time to stick to it. If you don’t have a plan, find an advisor you can trust to guide you through the process. The plan you create will become the compass that leads you where you want to go, regardless of how the scenery changes.