Shares entered a bear market after months of volatility. Many investors can understandably feel uneasy seeing losses in their account balances, news headlines and the ups and downs of market volatility.
During periods of volatility, it is important that investors avoid making reactive decisions. Having a well-constructed financial strategy can help you prepare for market volatility. Remember to stick to your plan and maintain a long-term perspective on investing.
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A few reminders for investors who may be feeling anxious about the current market:
Volatility is normal
Market volatility is perfectly normal. Market fluctuations are a natural part of investing, although 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 investment goals are further into the future, remember that the market tends to appreciate over time and recover from difficult periods. In fact, the S&P had an average annual decline of 14% and still generated positive returns for 32 out of 42 years. That’s why it can be so important to stick to your long-term plan and remember what you’re investing for. Stopping or reducing your pension contributions can negatively impact your long-term investment returns. Selling your investments in a panic will 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 understand why investing for the long term is so important. Historical data shows that some of the market’s worst days are followed by some of its best days. Over the past 20 years, seven of the best days occurred within only about two weeks of the 10 worst days. Missing out on some of the best days can affect your long-term investment performance.
Be disciplined and remember that the time you invest is one of the most important factors in building your wealth. It’s about timing the market, not timing the market.
Measure your risk tolerance
This is a good time to remind yourself of the importance of measuring your risk tolerance. Your risk tolerance, simply put, is your ability to handle potential investment losses.
To understand your personal risk tolerance, ask yourself the following questions:
1. How comfortable am I with taking risk?
How will you react if the market goes down and your account balance shows losses? How many losses can you take without panicking or losing sleep?
2. What is my investment schedule?
It is important to consider when you will need your money. Outlining your investment schedule can help you understand what risk you can take.
If you don’t need the money for 30+ years, your investments have a longer period of time to recover from potential downturns. With a few decades ahead, to overcome 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?
Consider your complete financial picture. This includes all of your investment accounts, an emergency cash fund, and any debt.
Consider 3-6 months of cash savings from your expenses for potential emergencies – this is for times when you need quick access to cash. You want to avoid a situation where you have to sell your investments to deal with an emergency.
Finally, don’t forget the importance of diversification. Don’t keep all your eggs in one basket. During periods of market volatility, diversification can help smooth out your investment returns.
Periods of market volatility can feel stressful. Stick to your long-term financial strategy. Volatility is perfectly normal and history has shown the value of staying invested. Don’t let your emotions drive you into a decision you may later regret – stay diligent and focus on your long-term plan.
Tequila Swan is a private client advisor for JP Morgan Wealth Management based in Phoenix, Arizona. In 2022, she was named by Forbes as the top female wealth advisor in the state.
Editor’s note: The views, opinions, assessments and strategies expressed herein represent the author’s judgment based on current market conditions and are subject to change without notice and may differ from those expressed in other areas of JP Morgan. This information in no way represents JP Morgan Research and should not be treated as such. You should carefully consider your needs and goals before making any decisions. For further guidance on how this information should be applied to your situation, you should consult your advisor.