Ten Tips to Cope With Market Volatility

By Barbara O’Neill, Ph.D., CFP®

With respect to investments, the word “volatility” refers to sharp up and down movements in prices. For example, the last couple of months have been rough for investors as stocks officially entered the bear market territory. Personal Financial Managers (PFMs) are undoubtedly answering clients’ questions and calming frayed nerves.

Below are ten tips for PFMs to share with clients to help them cope with market downturns and volatility:

1. Avoid Emotional Decisions. Volatility is a normal part of investing and is to be expected. The worst thing that someone can do is “panic sell,” thereby locking in a loss. Automatically investing every month in up and down markets (e.g., TSP contributions) is one of the easiest ways to mitigate the risk of emotional investing.
2. Stay the Course. Being nervous during market downturns is normal, especially for inexperienced investors. Market volatility is also normal. Instead of worrying about market performance, which cannot be controlled, investors should focus on controllable things such as household spending and investment expenses.
3. Take Advantage of Sales. It has been said that the stock market is the only “store,” where, when it has a “sale” (i.e., stocks trading at lower prices), people run away. During market downturns, people can buy more shares of an investment for a fixed deposit amount (e.g., $100 or 3% of pay).
4. Avoid the Urge to Micromanage. Some people have an urge to constantly watch the market performance on cell phone apps. This can lead to irrational action. Bad days in the market are emotionally draining. Looking at stock prices daily also makes it much more challenging to maintain a long-term perspective.
5. Maintain Perspective. Obviously, this is easier said than done. However, historical performance data can help calm frayed nerves and remind clients that investing requires a long-term time horizon. There has never been any 20-year rolling time period between 1926 and 2020 when the stock market has lost value.
6. Don’t Time the Market. Investors should stick with an investment strategy in up and down markets. Catching high and low prices (i.e., market timing) is generally futile because investors have to be right twice (i.e., when to get out and back into stocks) and often miss the best trading days, which can happen during bear markets.
7. Diversify Across Asset Classes. Selecting investments from different asset classes (e.g., stocks, bonds, cash equivalents, real estate) will not necessarily keep someone’s account from losing value in a down market, but it can help to mitigate losses. A well-diversified portfolio should be a key part of everyone’s investment strategy.
8. Rebalance as Needed. By rebalancing, investors return to target asset class weights (e.g., 60% stock, 30% bonds, 10% cash) that shift with market volatility. It keeps risk levels consistent. Rebalancing can be done by selling securities in over-weighted assets or placing new deposits in underweighted assets.
9. Understand Investment Risks. There is no guarantee of anything in investing and past performance does not predict future results. Understanding and accepting investment risks (e.g., market risk, business risk, interest rate risk) is essential to avoid making costly future mistakes. Cash assets risk a loss of purchasing power.
10. Get Help When Needed. Smart people seek the advice of others to take a look at what they’re doing with their money and offer helpful recommendations. Like research that shows most people believe they are “above average” drivers, studies find that investors- especially males- tend to overrate their skills and knowledge. Financial advisors can provide valuable “gut checks” when investors are panicking.

Remember that investing is a long-term proposition. Patience is an important factor in investment success. Don’t make long-term investment decisions based on short-term market events.

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