Retirement, Investments, & Insurance for Individuals Build your knowledge What should you do when there’s market volatility?

What should you do when there’s market volatility?

A market dip may cause stress and worry. These tips can help you focus less on the news and more on your financial goals.

Photo of a woman leaning over a table and reviewing documents related to her investments due to market volatility.
4 min read |

Markets move in cycles; sometimes they’re up, sometimes they’re down.

But periodically those cycles quicken, with sharp, momentary declines that grab headlines and cause you to worry—or even question your savings strategies. “It's been said that panic is not an investment strategy. But sometimes adages are easier said than done,” says Heather Winston, financial professional and product director for Retirement and Income Solutions at Principal®. “Try to put your emotions into context. What may feel like a big event may prove to be a short period of time throughout your investing life.”

These tips are things you can control—to help ease your worries, understand how to manage market volatility, and protect your retirement savings.

Let the history of the stock market guide you (and help ease your worry).

In the last 150 years in the United States, market downturns have accompanied all sorts of events, from wars to pandemics. But even the worst market declines have generally been followed by a significant recovery. For example, in 2020, just over 25 weeks after initial COVID-19-related market drops, stocks had recovered to pre-COVID peak levels.

When the markets go down—and stay down—that’s usually when it makes the headlines, and we start to notice it (and maybe panic). Jumping out of the market when it goes down can create a tough scenario: When will you know to get back in? When market volatility makes the news, this adage can help: It’s never about timing the market. It’s more about time in the market.

In reality, if you were to watch the markets closely every day, you’d see that they constantly move up and down … and up and down. When markets enter an extended period of gains exceeding 20%, that’s often referred to as a bull market. On the flip side, when down times last an extended period with losses of at least 20%, that’s called a bear market. (The good news: Over the last 100 years, the average bear market in the S&P 500 Index lasts just under 14 months).

Though it may seem counterintuitive, times of market downturn can be a good opportunity to buy investments at a lower price. You just have to be willing to endure the possibility of your investment balances declining until the cycle flips again, bringing the possibility of greater returns.

Case study: Timing the market

Here’s a case study of what happened during 2008 and 2009 that looks how timing the market could impact your retirement savings.

  • In January 1, 2008, you have $100,000 invested in the market; at year’s end your balance is $64,388.
  • You withdraw your $64,388 and put it into a certificate of deposit (CD) with a guaranteed interest of 2% for the next five years. During that time, your balance increases to $71,090.
  • If you had left your money in the market, based on S&P 500 Index returns at that time, you would have had $123,862 after five years, or $52,772 more.

Putting money in a CD vs. staying in the market (2008 to 2013)

Chart showing if you took money out of your account in 2008, you’d have $52,722 less 5 years later than if you kept it invested.

Focus on your financial goals.

Short term, you may be trying to increase your 401(k) savings rate to get your full employer match. Market volatility doesn’t impact that goal. Long term, you may want to retire at a certain age. Your retirement account statement may fluctuate in the face of a bumpy market, but lasering in on those daily numbers is less important than the steps you’re taking to achieve that retirement dream.

"We save and invest to meet a lot of goals in our lives, retirement being a significant one,” Winston says. “That said, no matter your time horizon, there are things you can do now—regardless of what the markets are doing—to help improve your financial situation."

Those include:

Short term Long term
Review day-to-day finances. That includes fine-tuning your budget and building an emergency fund. Create a list of long-term financial goals such as buying a house, paying off a mortgage, or starting a business.
Make a plan to pay off debt, if you have any. Not all debt is bad, but paying down things like high interest rate credit cards should be a priority. Doing so may make your long-term goals more attainable. Envision your retirement. Market volatility is what’s happening in the moment; retirement savings benefit you in the future.

Tip: Nearing retirement? Read up on specific ideas for protecting your nest egg from market volatility.

Review your risk profile.

Simply put, risk tolerance is the degree to which you can emotionally endure losses. But there is another form of risk, called risk capacity, which is equally important. Risk capacity is closely aligned to the time needed to attain your goals.

“When we are young, we typically have the capacity to take more risk because our timeframe to use our savings is many years in the future,” Winston says. “But as we age, our capacity to take risk diminishes because our goals may not wait for the market to recover.

“You either have time on your side or, quite frankly, you don’t. We use both types of risk to help you start to understand what kind of investor you are.”

Want to better understand your risk tolerance and capacity? We have a seven-question risk profile quiz (PDF) that can help you get started.

Increase your retirement account contributions or open an IRA.

It can feel counterintuitive in periods of market volatility to continue to save, but the money you’re putting aside is for the long term, not the bumpy moments. A percentage from a raise, a tax refund, or a portion of a bonus can all boost your retirement savings.

If you have an employer-funded 401(k), think about opening your own traditional individual retirement account (IRA) or Roth IRA. And if you add a lump sum to an account during a valley in market activity, you’re also buying low, meaning you’re getting more for your money.

Learn more about IRAs.

Rebalance your investments, or switch to automatic rebalancing.

You may have heard of asset allocation—or how you split up your investments across various asset classes—to create a personalized balance of risk and reward.

Consider each investment you hold through the lens of how it fits into your asset allocation and your tolerance for risk —whether it's an individual stock or bond, or a basket of securities like a mutual fund or exchange traded fund. “The reason for this is simple,” Winston says. “Not everything moves in tandem.

“Asset allocation gives you the benefit of having parts of your investments that are performing well, even when other pieces may not be. Because it's tied to your comfort level with risk, using this strategy can help ease worries during times of volatility.”

If this concept sounds overwhelming, there are options that take the decision-making burden off you. Target date mutual funds and managed accounts (both generally available within retirement accounts like 401(k)s and IRAs) turn some of the responsibility of researching, investing, and rebalancing over to a professional.

Learn more about TDFs.

Check in with a financial professional.

A financial professional’s job is to understand what’s going on in the markets and translate that to you. That expertise combined with their understanding of your unique risk profile and goals makes them a great resource in your financial journey.

Don’t have one? Read more on why you might want to work with a financial professional.

What’s next?

Do you understand your current asset allocation? Log in to your Principal account to see your current mix of investments—and access tools for long-term planning and auto-rebalancing. First time logging in? Create an account.