Are You and Your Portfolio Prepared for Market Volatility? 5 Tips to Weather the Storm
It is always a matter of when, not if, market volatility will occur. During these stressful times, it is important not to overreact and make decisions that may jeopardize your long-term financial plan. However, that does not mean you should do nothing.
If the current stock market volatility has you wondering if it’s time to review your financial plan, Allegiant Private Advisors suggests starting with these steps that every investor should consider during a downturn.
1. Check Your Allocation
It is always important to understand how you are invested, but never more so than during periods of volatility. When volatility strikes, it’s important to review your asset allocation and ensure it still matches up with your own personal risk tolerance and goals. As your financial situation and needs change, your portfolio should change as well.
If you are approaching retirement—or have recently retired and are now adjusting to the transition from the accumulation to the distribution phase—an in-depth review of your portfolio’s allocation is likely overdue. For those already in the golden years of retirement, taking withdrawals from your portfolio to supplement your lifestyle, you should ensure that you have adequate cash reserves set aside to cover these needs.
When markets are performing well, allocation issues can go unnoticed. It is only when volatility strikes that you may find that you have been taking on more risk than you can afford to.
2. Control What You Can: Spending Levels
Along with reviewing your allocation, you should also take a close look at the withdrawal rate from your portfolio. Reducing withdrawals during down markets can greatly extend a portfolio’s lifespan. For this reason, instead of using a static withdrawal strategy of taking a set percentage each year, the team at Allegiant Private Advisors advocates using a dynamic withdrawal strategy, which ebbs and flows based on market conditions. In years where markets perform well, we urge clients to take additional withdrawals to go on that once in a lifetime trip. However, during years when markets are down, limiting discretionary withdrawals can keep investors from having to sell investments at depressed prices. This sort of flexibility can go a long way in allowing investors to achieve their long-term goals.
3. Tune Out the Noise
Watching markets minute by minute or reading financial headlines on a daily basis is enough to drive any investor crazy. During periods of volatility, it is important to remember that the media is paid to sell ads, not to educate the public. Therefore, while investors should certainly stay abreast of what is going on in the economy and markets, taking a step back and not feeling the need to react to every headline can help you avoid making emotional decisions. Sorting through the noise present in markets and focusing on the underlying economic data to drive decision-making is a big part of our job as trusted advisors for our clients.
4. Remember Volatility is the Rule, Not the Exception
Stocks by their very nature are a volatile asset class. While volatility has been somewhat muted in recent years, it is important to remember that it is normal – and even healthy.
Corrections of 10-20% are regular occurrences and should be expected about once a year. It is because of, not in spite of, this volatility that equity investors are able to earn higher returns than bond and cash investors over the long-term. Expecting and accepting these fluctuations from the portion of your portfolio that is invested in the stock market can help properly frame your thinking when volatility does pick up.
5. Stick to Your Long-Term Plan
Remember that your investments are meant to accomplish your financial goals, which extend for decades and years, not days and months. Those who exercise patience during short-term volatility will be rewarded with long-term gains. (Scroll down to view charts.) Do you have a plan? If so, does your financial plan account properly for the inevitable periods of economic ups and downs in the market?
*Allegiant Private Advisors is located at 240 South Pineapple Ave., Suite 200, Sarasota, FL 34236. For more information, call 941-365-3745 or visit allegiantpa.com. Advisory Services offered through Commonwealth Financial Network, a Registered Investment Adviser.