How to Handle Market Volatility
In a three-day stretch to start the week, the Dow dropped 1,071 points, climbed 565 points higher the next day, only to give back 1,051 points yesterday.
It’s a wild ride, and one that had many investors worried.
Unfortunately, it meant that millions of investors, possibly yourself included, made poor decisions three days in a row.
They panic sold on Monday as the Dow plummeted, fearful of losing even more of their nest egg.
When the market rallied on Tuesday, they worried about missing out and quickly bought back in.
And then on Wednesday when the Dow dropped over 1,000 points, they hit the exit button once more.
It’s not easy to watch the market yo-yo up and down and do absolutely nothing with your retirement portfolio but sit on your hands.
It’s human nature to want to do something when you see your hard earned money temporarily worth less than it was the day before.
If this sounds like you, you’re not alone.
On Friday, February 28th of this year the Dow Jones Industrial Average closed down 10.5% for the week.
Research from Alight Solutions 401(k) Index, which tracks daily activity at 401(k) plans provided by large employers, showed trading activity that day was the highest in the index’s history at 15.8 times normal volume.
The previous day, February 27th saw the Dow close 2.8% lower, and trading volume in 401(k)’s was 11.37 times higher than average.
“Even in the depths of the financial meltdown in October 2008, we didn’t see this type of abnormality,” said Rob Austin, head of research at Alight.
The Best Way to Handle Market Volatility
If you are spooked by volatile markets like the one we’ve had this week, the important thing to evaluate is your risk appetite.
If you are retired or nearing retirement, think about your portfolio allocation and if being invested in stocks is right for you. If you are over-invested in stocks, you could be putting too much of your nest-egg at risk late in the game.
Most financial planners or investment advisers like the rule of thumb “100 minus age.”
Using a 65 year old for an example, the math works out to be:
100 – 65 = 35.
So you shouldn’t have more than 35% of your portfolio in stocks and have at least 65% of your portfolio in fixed income.
Of course every situation is different, but these are “rules of thumb” for a reason: for the vast majority of people, they work.
The other consideration with your age is the time you have left to be invested. The same 65 year old we used as an example above will likely live past the age of 80. That’s at least 15 more years to be invested in the market to make up for any temporary losses today.
So losses today, while painful, aren’t crippling if you:
- Don’t sell. It’s one thing to be down on an investment today. It’s another thing to sell the investment and lock-in a loss you can never make up.
- Take a long term approach. Being down 20% on an investment might hurt, but if you have 15 investment years left to make up the loss, 20% seems like nothing.
While market volatility isn’t easy to deal with, having a clear game plan and not getting caught up in the day-to-day fluctuations gives you a better chance of long term success.