Volatility in the markets is normal. It’s been said that volatility is a tax that investors have to pay for harnessing the wealth-building power of the financial markets. Knowing this doesn’t make market fluctuations any less nerve-wracking especially if you’re nearing retirement age.
Some investors react to volatility like they’re living in the path of a hurricane. They board up the windows, gather the essentials, stay put, and hope the storm passes without hitting too hard. Others may get nervous about investing and want to sell some investments and move the proceeds to cash.
If you have prepared appropriately for market volatility, then normal market fluctuations shouldn’t be a concern and you should continue living your life and spending your money as you usually do.
The tough part is that not everybody has prepared appropriately.
Have you done the work necessary to keep your finances on track regardless of what the financial markets throw at us?
1. You have a financial plan that covers all your bases.
No financial plan is totally immune to market fluctuations, but having a solid plan that involves diversifying your investments can take out some of the risk. You can be confident that no single market event is going to jeopardize your long-term security.
Where you have the most direct control over your finances is your personal spending. If retired, it’s always important to spend within the boundaries of your annual withdrawal plan. Younger investors might consider increasing planned savings contributions during a downturn, especially when counting on that money for a home or auto purchase in the near future.
Sticking to your plan and living within your means are two of the best financial moves anyone can make during market volatility.
2. You understand your relationship with money.
It’s important to be self-aware of what your relationship to money is really like. Make sure your comfort level with risk is reflected in how you’re invested in the markets.
Your stage of life can influence your comfort level and ability to handle volatility. Are you just getting started, supporting a growing family, or approaching retirement? The amount of risk you feel comfortable taking may be very different at each of these stages in your life. Investing within your comfort level means you are more likely to stay invested for the long term.
Having someone in your life who understands your attitudes towards money is one of the biggest advantages of working with a financial advisor. Always consult a professional who knows you, your history, and your goals before you let bad news or scary headlines distract you from a well-thought-out plan.
3. Your focus is long-term, not short-term.
Certain current market indicators can be unnerving to investors. Short-term interest rates are hovering near the same level as longer-term interest rates. Major stock market averages have experienced daily drops that, while not unusual, still grab your attention. Global trade disputes and political turmoil continue to unsettle investors.
There are positive economic numbers to consider, too. The markets are still showing nice gains for the year. Unemployment is low. Job growth and economic output are still reasonable. Recent market dips have often been followed by rallies.
Investors who try to time their investments to these or any other economic signals are looking at market history through a dangerously narrow lens.
Ultimately, the size of your nest egg won’t be determined by one week, one month, or even one year. True wealth is built slowly, over decades of steadfast saving and investing, careful planning, and thoughtful rebalancing when necessary. Today’s financial losses might be tomorrow’s investment gains or vice versa. Don’t let short-term market worries impact the life you enjoy as a result of your hard work and planning.