Personal Finance 101 – A Market Volatility Survival Guide

By Brittany Mollica

Fellow Millennials: if you’re feeling anxious right now because of the spread of the coronavirus coupled with the dramatic drop in the stock market, know that it’s normal to feel stressed and you’re not alone. Well … you may be literally alone if you’re practicing social distancing and don’t have a roommate. But we’re all in this together.

Writing as a financial advisor, I can’t provide any insight regarding public health concerns, but I can help put this stock market volatility into perspective.

If you’re part of my generation, it’s likely that your only experience with a stock market crash is from seeing your parents’ reactions during the 2001 recession and the 2008 financial crisis. Or possibly with your own portfolio in 2008 as a very new investor with little to lose.

You know that theoretically – cue Dad’s voice here – “you’re investing for the long-term” and “you’re supposed to buy low and sell high”. But it is undeniably tough to watch your account balances fall – that’s your hard-earned money! This is where your financial advisor comes in. We’re here to remind you of the bigger picture so you can stick to your plan, take advantage of any investment opportunities, and, just as importantly, not lose any sleep over it. Here are our top five survival tips for extreme market volatility:

1. News headlines tend to over-dramatize. If your primary source of financial information is a news website (or something you heard from your coworker’s sister’s friend), it’s likely that will add to your worries about your finances. Instead, we recommend talking to your financial advisor or reading analysis written by investment companies (ex. BlackRock, Charles Schwab, Fidelity, Vanguard, etc.) to get a better sense of what’s happening in the economy. These resources tend to rely more on economic data and will keep a longer-term perspective in mind.

2. Stock market drops are normal. No matter where you get your news, you may notice some of the following terms being used. Understanding what these mean and knowing that they’re a regular part of investing is critical to being a smart investor:

  • Market correction – this usually refers to a 10%+ drop in the stock market. Market corrections are very common; you can usually expect to see one in any given calendar year.
  • Bear market – typically this is a 20%+ drop in the stock market. A bear market is less common than a market correction and often coincides with the beginning of a recession. As I write in March 2020, we have seen a sudden bear market with the arrival of the coronavirus pandemic.
  • Economic recession – a recession is a decline in economic activity, commonly defined as two straight quarters of negative GDP growth. Recessions are an inevitable part of the economic business cycle; the economy cannot grow in a straight line forever. Some recessions are more serious and long-lasting than others, but if you have a stable job and sufficient cash reserves then it’s likely a typical recession would not have a noticeable impact on your life.

3. Cash reserves are your lifeline. Regardless of how your investments are performing, we believe that your Emergency Fund is the cornerstone of your financial plan. As long as you have enough cash set aside for a “worst-case scenario”, whether that’s losing your job or being quarantined while on vacation, you will be better prepared to ride out the unknowns of a market downturn. If you’re reading this wishing you had some extra savings in the bank, use this as a reminder for the next time you get a bonus or a pay raise.

4. Stay invested and stay diversified. Although the ideal investment strategy is to “buy low and sell high”, many people do the opposite. We’re all human; it’s hard to watch your investments drop without wanting to sell everything to mitigate your losses. However, many financial advisors will tell you that you haven’t actually lost money until you sell your holdings, and that the key is to stay invested in a diversified portfolio. This is important because history has shown us that it’s impossible to predict when the market may suddenly rebound. What’s more – many of the best days for investments have occurred during bear markets. Missing out on a market rally can be detrimental to your long-term performance. 

5. View this as an opportunity. For those of us who are years away (let alone decades away) from needing to withdraw our retirement money, a market downturn can present a significant opportunity. Imagine that you’re shopping at Lululemon and everything is suddenly 50% off. That’s a great deal – you would want to stock up on all your favorite leggings and maybe even resell them at full price after the sale is over. Similarly (and arguably a better investment than Lululemon leggings), if you have extra cash that you’ve been holding onto, a market drop can be a great opportunity to invest while prices are low. Some other strategies to take advantage of a market downturn might involve:

  • tax-loss harvesting in a nonretirement brokerage account,
  • shifting to a more aggressive investment portfolio or
  • initiating Roth Conversions

As always, we recommend you consult with your financial and tax advisors before implementing any of these strategies.

When investing, it’s important to not too get caught up in the daily news. Instead, stay focused on your goals and remember that you’re in it for the long haul. If you’d like to talk about our investment outlook or discuss any strategies that you could implement, please reach out. We hope you stay healthy!

 

Disclaimers:

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. 

Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss.

The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. As with any investment or strategy, the outcome depends upon many factors, including investment objectives, income, net worth, tax bracket and risk tolerance.  Individuals should consult with their tax accountant and/or legal representative before implementing any tax or legal strategy.  Past performance is not indicative of future results.  

The information contained herein is believed to be true as of the date of publication. It may be rendered out of date by subsequent legal or tax-rule changes, as well as variable economic and market conditions.