Market volatility isn’t unusual, but that doesn’t mean it’s welcome. What can you do when it happens to help protect your financial goals?
In the last 150 years in the United States, market volatility has accompanied all sorts of events, from wars to pandemics and business downturns. In fact, if you watched the markets closely every day, you’d see that they constantly move up and down … and up and down.
So what is market volatility? Simply put, market volatility is a period of more dramatic or rapid highs and lows in the markets. But—and this matters—even the worst market declines have generally been followed by a significant recovery. For example: Since 1956, the average bear market (a period of decline) has lasted 14 months with an average decline of about 36%. Bull markets (periods of growth), in contrast, last around 69 months and deliver average returns of 192%.
Nonetheless, volatile market cycles, be they short and sharp or sustained and gradual, may cause you worry. Here’s an explainer of what you can do when it (inevitably) happens.
Wanting to act when something happens is natural. When it comes to market volatility, those actions must take into consideration the impact on your financial planning, both today and in the future. Here are some ideas.
Stay put. Ever heard the adage, It’s not timing the market, it’s time in the market? That’s because, as noted above, periods of decline are typically followed by longer periods of growth. Jumping out of the market when it goes down or is volatile may decrease your savings long term. It also creates a conundrum: When will you know to get back in? And during downturns, your savings equal an opportunity to buy investments at a lower price.
Instead, consider inaction as the best form of action. “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,” says Heather Winston, financial professional and head of product strategy for Income Solutions at Principal®.
Make financial progress in other ways. "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 timeline, there are things you can do now—regardless of what the markets are doing—to help improve your financial situation."
Ideas include:
| Short term | Long term |
|---|---|
| Review day-to-day finances such as fine-tuning your budget and building an emergency fund. | Create a list of long-term financial goals: buying a house, paying off a mortgage, or starting a business. |
| Make a plan to pay off debt, especially high- interest rate credit cards. | Envision your retirement. Market volatility is what’s happening in the moment; retirement savings benefit you in the future. |
Review your risk profile. Risk tolerance is how much you can emotionally endure losses—how nervous market volatility makes you. 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. Both types of risk help you understand what kind of investor you are.”
Want to better discover your risk tolerance and capacity? Use this seven-question risk profile quiz (PDF). Use your results to ensure you’re matching your risk profile with your investment strategy. Still need guidance? A financial professional (see below) can help.
Increase your retirement account contributions or open an IRA. A percentage from a raise, a tax refund, or a portion of a bonus are budget-friendly ways to boost retirement savings. Market volatility doesn’t impact them.
If you already have an employer-funded 401(k), think about opening your own traditional individual retirement account (IRA) or Roth IRA. 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. And, an IRA travels with you, no matter the job you have.
Rebalance your investments, or switch to automatic rebalancing. 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.”
>If this concept sounds overwhelming, there are options that take the decision-making burden off you. Target date mutual funds and managed account services (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.
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 knowledge combined with their understanding of your unique risk profile and goals makes them a resource in times of volatility.
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.
