Don’t Get Spooked by Market Volatility

May 14, 2023

It’s never fun when the market takes a dive. For many investors, it can be downright scary. However, while it's true that some people may have less money at this point in time than they expected (or hoped), there are ways to mitigate the effects of a drop.

In fact, if you're still working toward retirement age, there's no reason to panic just yet: Savvy tax planning, paired with a balanced portfolio, may be able to help you avoid tricks and generate treats.

This blog explains these topics:

  • Volatility storms drift in and drift out
  • Avoid knee-jerk reactions
  • Never try to make up losses overnight
  • Avoid setting losses in stone

Volatility Storms Drift In & Drift Out

Market volatility is a fact of life, even for the most successful investors. Nevertheless, the question remains: how do you react to it?

When times are good and your investments are growing steadily, it's easy to forget about bear markets. Meanwhile, market volatility isn't something that comes out only under a full moon, Instead, it’s more like storms within the economic weather cycle: It may happen more often in some seasons than others. At the same time, overall, volatility tends to wind down eventually.

While a storm is raging, it can be tempting to avoid stocks, but this can become a mistake you regret. Shrinking back will likely cause you to miss out on opportunities (and it could even lead to periods of stagnation in your portfolio). Instead, consider taking a more active approach to managing your investments: The best goal might be a healthy balance between risk and reward.

You may also want to start using dollar cost averaging to place regular buys into a diversified portfolio (as opposed to investing lump sums of money at once). Dollar-cost averaging allows you to buy more shares at lower prices when markets are down and fewer shares when markets are up.

The advantage of this approach is that you could potentially benefit from both bear and bull markets without significantly increasing your risk over the long term. Additionally, it can make counterproductive, panic-selling urges easier to keep in check. That, in turn, can mean less regret in the years ahead.

Avoid Knee-Jerk Reactions

I know: Money is inherently emotional. We work hard to make it—and nobody smartly likes the idea of suddenly losing it. However, keep in mind that investing is a long-term undertaking: If you try to bake a cake but can’t keep yourself from opening the oven every two minutes to check on it, odds are that it won’t rise. You could even cause it to come out sunken in the middle.

In other words, don't allow yourself to get too emotional when the market goes down. Making sudden decisions based on your feelings is an investor’s recipe for disaster. I’m not asking you to become a robot. The simple truth is that no human being makes their best-reasoned decisions when they’re panicked (myself included).

Instead, take a deep breath, take an internal step back from the situation, and try to remain calmer. Time and repetition can help make it a little easier to think clearly about what actions are best for your business's long-term health.

Never Try To Make Up Losses Overnight

When you see losses on paper or in real-time (especially if they're large ones), it can get tempting to recoup them as quickly as possible. Everybody feels this urge to try to make things seem normal again. Regardless, it’s another knee-jerk mistake.

It isn’t always possible or practical for many reasons. First of all, sometimes it takes longer than expected for things to both get back on track and start improving. Second, it may not be wise (or, in some cases, even legal) for companies whose shares have recently been hammered by bad news.

Last but not least, there might be more troubling news ahead before things get better (hopefully not, but no mortal typically knows). So, hurriedly trying every avenue under the sun often ends up being an exercise in wasting even more money, worsening the impact of your initial losses.

Again, take a deep breath and an internal step back. Next, remember:

  • Trying to make up for your losses overnight is self-defeating. Acknowledge the desire, but avoid making things worse by giving in to it.
  • Predicting the market is impossible. We can only react and adapt to its changing conditions over time.
  • Market volatility is normal. As a result, you should expect it to come and go from time to time.
  • Keep a long-term view of the market. Successful investors often consider what will happen if they invest in a company for five years or more.

As you read this, some investors are selling off and taking avoidable losses—because they’ve panicked and lost their long-term perspective. If you can remember the points above, instead of doing the same, your probability of overall success in reaching your financial goal is likely to skyrocket.

Avoid Setting Losses in Stone

It can also help to remember that until you actually sell your shares, any losses you see are strictly on paper. In other words, if that company’s stock is gaining again this spring—and you still own them—your losses will just be a bad memory (possibly replaced with gains over time).

If you know firsthand that a company is being chronically mismanaged, that could be a reason to consider selling those shares. Otherwise, it’s generally far better to ride out volatility and assess things in daylight when the storm has passed. In fact, bear markets have been known to temporarily lower the price tag on valuable, promising stocks. This can make some of them once-in-a-lifetime bargains.

The Sum Total

Once you have your emotions in check, keeping your portfolio well-balanced is the next key to optimal investing. Put another way, some investments weather storms better than others—and at the same time, others may generate higher returns than the storm-resistant ones when the market is calmer.

Allocating (or buying into) the right kind of investments for the economic weather tends to limit or even prevent possible losses. In some cases, it can even help you generate returns when volatility is costing other investors thousands of dollars (or more) as well. This isn’t a guarantee—because there’s no such thing as a real-life crystal ball—but strategic allocations have been known to increase the return on investment (ROI) that someone can receive.

“Asset allocation” refers to how you divide up your money among different types of investments, such as stocks, bonds, and cash equivalents (such as short-term bonds). Financial advisors’ goal for asset allocation is always to try and help investors maximize their returns while minimizing risk exposure.

Ironclad Wealth Management specializes in helping entrepreneurs make well-informed asset allocation decisions, developing tax strategies for high-income earners, and providing enviable retirement planning in Atlanta. Contact us today.

If Patrick Can't Save Your Business $5,000 in Taxes, You Get Your Money Back.

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