Beginner’s Guide to Market Volatility

'This will, like other storms, pass': How financial planners are helping clients manage market swings

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For new investors, and even for seasoned ones, the last few weeks have been tense. On Monday, both the S&P 500 and the Dow Jones Industrial Average saw their worst days since 2008, with the S&P 500 dropping 7.6% and the Dow dropping 7.8%. On Tuesday morning, the markets surged, with both indexes jumping more than 3%, before giving up much of those gains by noon. Traders continue to fear the coronavirus's potential effects on the world economy. 

Experts caution that it's important to stay calm. Here's what certified financial planners across the country are telling worried clients and how they're helping to assuage their fears about their investments.

1. Even when markets fluctuate, stay the course

Market fluctuations are normal and even expected. But they can still be anxiety-producing, especially for younger investors who have only witnessed the outstanding past decade in the market. The record highs set during the 2010s can, by comparison, make the recent steep drops seem unusual or scary. 

But a market decline of at least 10% from a prior high, or what's known as a correction, typically happens a little more than once a year, on average. 

"We've seen clients through the market cycles of 2001 and 2008, and many other ups and downs," says Laura Bereiter, a certified financial planner and the director of tax and financial planning for White Oaks Wealth Advisors in Minneapolis. 

We've seen clients through the market cycles of 2001 and 2008 and many other ups and downs.
Laura Bereiter
CFP

Though it may seem counterintuitive, you stand to lose money if you pull out of your investments during a period of decline, says Bereiter. One rash move may mean you'll miss out on years or even decades of growth. It becomes much harder for your finances to recover if the market is on the upswing again and you've abandoned your investments.

That's especially true for younger investors, who have the benefit of a long time horizon before retirement and can build wealth over time thanks to the power of compound interest

"If you have diversified investments in a 401(k) or IRA, for example," she says, "but are many, years away from using those funds for retirement, then you are experiencing volatility as the market shifts, but you are not hurt by the volatility. You could be hurt by volatility if you sold all your investments now, sat in cash, and then reinvested when you felt the market was recovering."

2. Downturns in the past have always ended in upturns 

"We are reminding clients that markets have been generally up for 11 years," says Laurie Kane Burkhardt, a certified financial planner with Modera Wealth Management in Boston, "and that we have been anticipating a correction (albeit not triggered by a potential health crisis)."

Your investments have likely grown over this decade of record highs. And they will likely continue to over the long run, despite the current short-term drops, since in the past every downturn has ended with an upturn. 

"It can be very scary if you have existing shares in the market," Marguerita Cheng, a certified financial planner and the CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, recently told Grow. "They're going to decrease in value. I get it. But when they dip in value, you're going to be able to buy more shares." 

Legendary investor Warren Buffett, who has expressed continued confidence in American businesses, suggests that turbulence shouldn't affect how you invest. He told CNBC during a market dip in February that a slump "gives you a chance to buy something that you like, and you can buy it even cheaper." His company "certainly won't be selling," he added, though it "could easily be buying something."  

If you have diversified investments in a 401(k) or IRA, for example, but are many years away from using those funds for retirement, then you are experiencing volatility as the market shifts, but you are not hurt by the volatility.
Laura Bereiter
CFP

3. 'Put the phone down' and check trusted sources

Some financial planners emphasize the importance of striking a balance between obsessing over every update and avoiding the news completely. 

"Put the phone down and turn off the TV," says Edward J. Snyder, a certified financial planner and co-founder of Oaktree Financial Advisors in Carmel, Indiana. "Avoid being blasted with stories of gloom and doom. If you feel you must check the headlines, try sources like the Centers for Disease Control and Prevention."

If recent headlines have you on edge, experts recommend not even checking your 401(k) or IRA more than once a quarter. That way, you're not tempted to make a rash decision based in fear that could harm your long-term financial health.

"This will, like other storms, pass," says Michael F. Kay, a certified financial planner and president of Financial Life Focus in Livingston, New Jersey. "Take a walk, read a book, meditate, listen to music, hug someone you love. ... Focus on what you can control and know that short term reactions are just that: short term."

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