Stocks have entered a bear market after months of volatility. Many investors may, understandably, be feeling uneasy seeing losses in their account balances, news headlines, and the ups and downs of market volatility.
During periods of volatility, it’s important for investors to avoid making reactive decisions. Having a well-built financial strategy can help you prepare for market volatility. Remember to stick to your plan and maintain a long-term view for investing.
A few reminders for investors who might be feeling anxious by the current market:
Volatility is normal
Market volatility is completely normal. Market swings are a natural part of investing, even though they can be painful. You can think of volatility as a consequence of being able to build your wealth over the long term.
If your investing goals are farther in the future, remember that the market has a tendency to appreciate over time and recover from rough periods. In fact, the S&P had average intra-year drops of 14% and still generated positive returns in 32 of 42 years. This is why it can be so important to stick to your long-term plan and remember what you’re investing for. Pausing or reducing your retirement contributions can negatively impact your investment returns in the long term. Selling your investments in panic would just lock in your losses. Don’t let your emotions derail your strategy.
The importance of investing for the long term
Investors can look at historical market performance to help understand why investing for the long term is so important. Historical data shows that some of the market’s worst days have been followed by some of its best days. Over the past 20 years, seven of the best days happened within just about two weeks of the 10 worst days. Missing some of the best days can impact your long-term investment performance.
Stay disciplined and remember that the amount of time you are invested is one of the most important factors in building your wealth. It’s about time in the market, not timing the market.
Gauge your risk tolerance
This is a good time to remember the importance of gauging your risk tolerance. Your risk tolerance, put simply, is your ability to handle potential investment losses.
To help figure out your personal risk tolerance, ask yourself these questions:
1. How comfortable am I with taking on risk?
How will you react if the market declines and your account balances show losses? How much loss can you stomach without panicking or losing sleep?
2. What’s my investing timeline?
It’s important to consider when you’ll need your money. Mapping out your investing timeline can help you figure out how much risk you can take on.
If you don’t need the money for 30+ years, your investments have a longer period of time to recover from potential declines. With several decades ahead to ride out possible volatility, you can take on more risk. However, if your timeline is closer to ten years, your risk tolerance should probably be more conservative.
3. What does my overall financial picture look like?
Think about your full financial picture. This includes all of your investment accounts, cash emergency fund and any debt.
Consider having cash savings of 3-6 months of your expenses for potential emergencies – this is for times when you need to quickly access money. You want to avoid being in a situation where you need to sell your investments to handle an emergency.
Finally, remember the importance of diversification. Don’t have all of your eggs in one basket. During periods of market volatility, diversification can help even out your investment returns.
Periods of market volatility can feel stressful. Stick to your long-term financial strategy. Volatility is completely normal and history has shown the value of staying invested. Don’t let your emotions trigger a decision that you might later regret – stay diligent and focus on your long-term plan.
Tequilla Swan is a Private Client Advisor for J.P. Morgan Wealth Management based in Phoenix, Arizona. In 2022, she was named a Forbes Best-in-State Woman Wealth Advisor.
Editor’s note: The views, opinions, estimates and strategies expressed herein constitutes the author’s judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.