4 Tips for Navigating Market Volatility

Market volatility is inevitable, but that doesn’t mean it isn’t concerning at times. Let’s explore some important tips and insights that may help you navigate market volatility in a smart and strategic way.

A sailboat sails into a storm.
(Image credit: Getty Images)

Despite the inevitable anxiety that accompanies it, stock market volatility may be beneficial. Corrections are a normal and essential part of the cyclical nature of the market, serving as a “pressure release valve” when equity markets soar too high too fast.

During the 17-month bear market that occurred from October 2007 to March 2009, the S&P 500 plummeted nearly 57%. (opens in new tab) Yet, it bounced back in a big way, ending 2009 with a 26% gain. More recently, during the initial month of the COVID crisis (from mid-February to late-March 2020), we saw the Dow Jones Industrial Average lose 37% (opens in new tab) of its total value, then rebound back up 43.7% by the end of the year.

The bond market has also experienced noteworthy volatility. From January 2021 through spring of this year, the Bloomberg Global Aggregate Index, a benchmark for government and corporate debt, dropped 11%, a record for global bonds (opens in new tab).

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These are the types of market swings that can test investors. A comprehensive plan can help paint the bigger picture, bringing the long-term back into focus, and outlining the many factors that go into reaching your goals — not just your investment returns.

So, what should you consider as you navigate market volatility?

1. Maintain Your Long-Term Focus

Over the years, those who commit to weathering the storm — remaining disciplined and focused on their long-term investment plan when markets turn volatile — eventually have been well rewarded for their patience.

History has repeatedly shown it’s not your timing of the market, but rather your time in the market that’s the primary driver of investment growth. While some may seek the calmer waters of cash, volatility-induced stock declines (particularly in the face of otherwise strong earnings data) offer an opportunity for long-term investors to reduce their average share cost through dollar-cost averaging. Dollar-cost averaging is when you invest the same amount of money in a particular security recurring over a certain period of time, regardless of price. This means that if the price of the security declines, your same monthly investment is able to buy a greater number of shares.

While extreme volatility may prompt investors to exit the market and sit on sidelines for a bit, it’s worthwhile to reconsider that strategy. A recent study by investor research firm Dalbar (opens in new tab) examined the average return achieved by investors over the past 20-year period, and found that while most do try to time the market, they have significantly underperformed the market as a result. Amid strong index returns, the average investor over that period has underperformed a simple, indexed 60/40 portfolio by 3.5% annually. On a $100,000 investment made at the start of 2001, that means you would have missed out on more than $170,000 of gains by the end of 2020.

2. Keep Cash on Hand and Pay Off High-Interest Debt

While you can’t control the markets, you can control how well you’re prepared to navigate the turbulent waters. Make sure you have an emergency fund set aside to cover at least six to 12 months’ worth of living expenses. This may help protect you from having to liquidate investments at depressed values to generate needed income, and, in turn, offer the ability to leverage a downturn’s subsequently lower prices.

If possible, pay down as much of your higher-interest (e.g., credit cards, auto loan) debt. But not at the expense of tapping into your emergency fund. The goal is to insulate yourself, as much as possible from other financial stressors when markets turn volatile, so you are less likely to make impulsive reactions that could lead to poor financial decisions.

3. Don’t Put All Your Eggs in One Basket

A diversified portfolio is a key factor in navigating volatility. Allocating your assets across a variety of types of investments may be helpful in reducing risk.

It starts with asset allocation, the act of dividing your investments among different assets, such as stocks, bonds and cash. There isn’t a set standard for how and where to allocate your assets. Instead, it’s unique to each investor, taking into account key factors of your individual financial picture, such as the time frame you have to achieve your goals, (e.g., retirement) and your preferred risk tolerance.

From there, it’s important to further diversify within each asset class. For example, ensuring that if you are investing in the bond market, your bond portfolio is not concentrated in one area. This allows you to be better protected during volatile times, minimizing risk if all of your holdings are not in a specific security.

In addition, if you are considering converting some of your traditional IRA assets to a Roth IRA, a market downturn (when the value of those assets has been reduced) may be an opportune time for a Roth IRA conversion — since the taxes you’ll owe may also be lower. Of course, Roth conversions aren’t for everyone, so make sure to consult with your tax adviser before taking any action.

4. Rebalance Thoughtfully

Over time, during a period of extended market gains a portfolio invested in 60% stocks and 40% bonds, for example, might see its equity allocation steadily climb to 75% while its bond holdings fall to 25%, due to the stronger performance of stocks relative to bonds. This may cause you to take on more risk than you either intended or need based on your long-term goals.

This is why it’s important to periodically rebalance your portfolio. Rather than regularly buying and selling stocks in a way that triggers capital gains, there are several rebalancing strategies that can help to minimize any potential tax consequences:

  • Think minimums. Consider setting a minimum threshold for rebalancing. This may help your portfolio to absorb some short-term market volatility without triggering purchase or sale transactions.
  • Consider the big picture. Don’t look at individual portfolios (taxable and retirement) in a vacuum. Even if target allocations in your taxable portfolio drift beyond acceptable risk limits, they may be offset by a reallocation of assets within your retirement accounts without any tax impact.
  • Be strategic about RMDs. If you’re 72 or older and taking required minimum distributions (RMDs) from your retirement account(s), you may be able to rebalance by drawing down your more profitable investments.
  • Donate wisely. Those who wish to contribute to a charity may want to consider gifting highly appreciated stocks. It’s a simple but effective way to restore target allocations without requiring any stock sales.

The Bottom Line: Stay Focused on Your Financial Plan

Warren Buffett once said: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.

Remember that volatility will come and go. But when you’re armed with a well-constructed, long-term portfolio, anchored in a comprehensive financial plan, you can feel more confident in staying on track toward achieving your long-term goals. And don’t be shy about seeking out the help of financial professionals. We’re always here for you to help provide advice and guidance as you work toward your goals, particularly during volatile times.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Martin Schamis, CFP®
Vice President & Head of Wealth Planning, Janney Montgomery Scott

Martin Schamis is the head of wealth planning at Janney Montgomery Scott, (opens in new tab) a full-service financial services firm, providing comprehensive financial advice and service to individual, corporate and institutional investors. In his current role, he is responsible for the strategic direction of the Wealth Planning Team, supporting more than 850 financial advisers who advise Janney’s private retail client base. Martin is a Certified Financial Planner™ professional.