A few thoughts on this crazy market…
This market feels kind of crazy right? Like if you look away for 5 minutes, you just won’t know how bad it will get. I think we’re all kind of freaked out at the moment, but I’d like to remind all of you out there about a few of the basics:
This Too Shall Pass
I’m a lover of bad metaphors, so bear with me here. These market swings, a.k.a volatility, are a lot like those last 3 reps of your last set at the gym or those seemingly never-ending contractions in labor. They feel absolutely unbearable as if you could not possibly withstand another round of this misery but here it comes. It comes, it’s terribly painful and then it passes. After it’s all done, you are left with a vague memory of how bad it felt in the moment, but the real pain fades and the outcome is desirable—- either the increased physical ability or a cute baby who wakes you up 10x a night (not that I have any experience with that lately). In this case, you’re left with an intact portfolio and a great opportunity to reassess your risk tolerance/capacity for the future.
I’ve been through quite a lot of periods of extreme volatility over the years, and I know that seeing your hard-earned money slip away in a matter of days can be unbelievably stressful. However, we know that market volatility can and will happen, and we need to be prepared for it— before it happens.
If you have a well thought out plan, you’re good!
This is a big caveat, but I think the key to successfully weathering these periods of market volatility both financially and emotionally is a solid financial plan. I’ve written before about what to expect from the financial planning process, but the biggest value is that you have clearly outlined financial goals and your various investment accounts (brokerage accounts, IRAs, 401k’s) are invested accordingly.
If you haven’t consulted with a financial planner before, be sure to evaluate what the purpose is of various investment accounts and whether you can afford to weather market swings or a significant drop in value before you need the money. If you need the funds in six months for a downpayment on a house, then you probably need to revisit how much of your account is invested in stocks and reallocate accordingly.
When investing for the long-term, don’t focus on short-term volatility
If you guys don’t follow Carl Richards on Twitter, you’re seriously missing out. He offers regular reminders on financial planning, how that fits into your overall life goals and keeping the market in perspective. He recently posted this helpful graphic, and I thought it perfectly illustrates how we need to remember that the daily fluctuations don’t matter so much as the long-term path we’re following. In short, if you’re investing for retirement 30+ years from now, remember that stocks tend to go up and they are a required part of every portfolio if you want to grow your assets and retire comfortably.
Revisit your financial plan- What are your goals? Are your short- or intermediate-term savings invested too aggressively? Were you being a little greedy and putting more money than you needed to in the market? If so, revisit your allocations and rebalance.
Check-in with yourself- how were you feeling these last few weeks with all this market volatility? Did you feel sick? Ambivalent? Joyful? That will help point you in the direction of your risk tolerance. If you felt sick, chances are that your investments are too aggressive for what you can handle emotionally. Take a look at your portfolio and reassess it to see if changes need to be made.
Look at your risk capacity- This is crucial and ties into reviewing your goals. Knowing whether you have the ability to lose 10% or 20% of a particular account is crucial to ensuring you meet your financial goals. If you need the funds in a month, then a 20% drop would be catastrophic. If you don’t need the money for 30 years, then a 20% drop is much less of a concern.
Reach out if you have other questions or want to begin the financial planning process for yourself.