Market Volatility Tempting You to Get Out? Read This First

An older man looks concerned as he helps his stressed wife take her blood pressure.

(Image credit: Getty Images)

Market volatility makes some people anxious — and understandably so. No one wants to see their portfolio’s value take a deep dive — especially those who are counting on that money to fund their retirements. But some people are better than others at riding out those difficult market days, weeks or months until the inevitable recovery happens.

Let’s take a quick look at just two types of people and how they approach a volatile market.

One group, watching those ups and downs, sees instability and decides they have had enough. They pull their money — all of it — out of the market and place it in a “safer” investment, such as a CD. That has a different risk, though. Yes, the money is safe, but the return often fails to keep up with inflation. Over time, the money’s buying power erodes.

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At the other end of the spectrum are those people who convince themselves that they can time the market. If they can manage to buy and sell at exactly the right moment to produce the best outcome, their thinking goes, they can beat the system. They’re trying to ride the upswings and avoid the downswings. But timing the market is tricky, if not borderline impossible. It doesn’t take a lot for the timing to be completely off and the hoped-for returns to be off as well.

A few market days make a world of difference

At retirement seminars, I often share a chart that illustrates why trying to time the market is an unwise strategy. The chart, with information compiled by JP Morgan, examines how a $10,000 investment would have fared in the S&P 500 over a 20-year period from January 1, 2003, to December 31, 2022, under a few different scenarios.

If you invested in the market at the beginning of that period and let your investment ride the full two decades, your average annual return would have been 9.8%. With that kind of a return, at the end of the 20 years, the $10,000 would have grown to nearly $65,000.

You would deserve a big thumbs-up for your resolve and ability to hold fast despite the market’s ups and downs that made others jittery. But let’s stop celebrating for a moment and examine how easy it would have been to fail to benefit from those gains.

If, over that time span, you missed the market’s 10 best days, the average annual return would have been much lower (5.6%), and your investment’s total worth would have been just under $30,000. A mere 10 days in a 20-year span would have made a huge difference in the return on your investment.

Let’s take it a step further and say you missed the 40 best days in those two decades. With that scenario, you would have lost money. The average annual return would have been -1.1%, and your $10,000 would be worth just over $8,000.*

To further demonstrate just how chancy timing the market is, consider these additional facts. Seven of the market’s 10 best days in our stated time period happened within two weeks of the worst 10 days. The second-worst day of 2020, March 12, was immediately followed by the second-best day of the year. Try timing that kind of volatility. It’s easy under those circumstances to fall into the trap of selling low and buying high — the exact opposite of what you want to do.

Risk, diversity and the right investment mix for you

While buy-and-hold typically remains a better strategy than timing the market, you don’t want to get carried away with that approach either. Periodically, you should revisit your portfolio and make sure it’s balanced the way you want and that it still matches your goals and needs. Maybe you will discover you want to reduce some of your risk or, conversely, that you need to be more aggressive.

But you should make those decisions in a thoughtful, measured way, not in an undisciplined manner driven by emotions or with the abandon of a gambler at the craps table in Las Vegas.

What you want to find is the happy medium, for you, that lies between the extremes of pulling all your money out of the market or leaving all of it in. (I say “for you” because the happy medium will not be the same spot for everyone.) Eventually, figuring out your happy medium comes back to two things: diversity and risk.

It may sound like a cliché, but you really do want a diverse portfolio with aggressive investments tempered by less risky ones. Removing yourself from the market completely, especially with the inflation rate we’ve had lately, isn’t a good move because even in retirement you want to see some growth. At the same time, it’s not a good idea for retirees or those nearing retirement to leave all their money in the market, because you no longer have time on your side to recover if the market plummets.

The question then becomes: How much risk can you tolerate? Will a 30% drop in the market keep you awake at night, adding stress to the retirement that should be relaxing and joyful?

Younger people don’t pay as much attention to volatility — and typically don’t need to. But a retiree’s portfolio isn’t affected just by the market. Retirees are also drawing money from their savings to live on, so it’s important to have multiple places to draw from for income in your retirement years.

The good news is that a financial professional can help you determine your risk tolerance and work with you to decide how to balance your portfolio in a way that is best for you. Then when market volatility erupts — and it will — you’ll know you’ve done all you can to avoid letting every up and down control your financial future.

* This example is for informational purposes only and is not representative of any WealthPoint Advisor’s accounts. Past performance is not indicative of future results, and actual client performance may vary due to differences in fees, market, market conditions and account-specific factors.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

WealthPoint Financial, LLC d/b/a WealthPoint Advisors (WealthPoint Financial), a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. Advisory services offered through WealthPoint Financial, insurance products offered through WealthPoint Solutions, LLC. WealthPoint Financial and WealthPoint Solutions are affiliated but separate entities. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. WealthPoint Financial, Form ADV Part 2A & 2B can be obtained by visiting adviserinfo.sec.gov and search for our firm name. Neither the information nor any opinion expressed is to be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice.

Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice.

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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.

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Lauren Ivester is a financial planner and co-founder of WealthPoint Advisors, where she helps clients work toward and achieve their financial and retirement objectives. She is a fiduciary and has passed the Series 7, 63 and 66 securities exams and has her life insurance license. Ivester began her career in 2005 as a financial adviser at Morgan Stanley, where she served as a primary point of contact for high-net-worth clients to help develop and maintain long-term relationships.