Beginner’s Guide to Market Volatility

Now is 'the worst time to pull away,' say experts, and more answers to FAQ from newer investors


If you're a new investor, leaving your hard-earned money in the stock market right now might seem daunting. 

Stocks have been on a roller-coaster ride in recent weeks as investors worry about the coronavirus fallout and plunging oil prices. On Monday morning, stocks fell so fast that trading was halted for the first time since the depths of the financial crisis in December of 2008. And despite a brief rebound on Tuesday, the market's ups and downs have many investors feeling queasy. 

Still, you shouldn't be making decisions with money that you won't be using for the next 20, 30, or even 40 years based on day-to-day market moves, says Carolyn McClanahan, a certified financial planner and the director of financial planning for Life Planning Partners in Jacksonville, Florida. 

Don't deviate from your long-term plan, even if you see your portfolio take a hit, she says. "Do not pull away. It's the worst time to pull away."

Here's how McClanahan and other certified financial planners say in response to frequently asked questions from younger investors who are concerned about market turbulence.

1. How do I stay calm when markets aren't?

Investors should have a long-term investment strategy they stick to, regardless of market volatility, McClanahan says. 

Doug Boneparth, a certified financial planner and founder of Bone Fide Wealth in New York City, agrees. "Don't panic," he says is his advice. And instead of focusing on the short-term volatility, keep your long-term investing goals in mind, like retirement. 

If you leave your long-term money in the stock market, history indicates you'll grow your wealth. Investors who stayed the course through the market's ups and downs over the last decade have seen big returns: The S&P 500 had climbed by more than 140%, even after yesterday's dip.

Though big swings can be unsettling, they're to be expected when you're investing in the stock market, says Lauryn Williams, a certified financial planner at Worth Winning in Dallas, Texas. "Historically, we've gone through cycles like this, and the market turns itself around."

"If you're a young investor experiencing wild volatility for the first time, use this as an opportunity to learn how to curb your emotions when it comes to your money and the markets," says Boneparth.

"One of the worst things you can do is let your emotions take over, especially when it comes to selling."

If you do pull your money out of the markets, you've locked in your losses and ensured that you won't benefit from a market bounce back. It could also mean you'll miss out on years or decades of growth powered by compound interest.  

2. Should I stop contributing to my retirement accounts?

When the stock market declines, your contributions shouldn't change, McClanahan says. "Keep investing in your 401(k). Keep putting 5% of your paycheck away. Too many people sell when things are low and buy when things are high, and that's the complete opposite of what you should be doing."

The overall advice is simple: Do nothing differently. If you feel an urge to stop investing in the market through a retirement account, or another investment vehicle, take a look at your asset allocation instead, McClanahan suggests. "Make sure your portfolio is diversified, meaning you're investing in a mix of stocks and other asset classes, and that you're investing in U.S. companies, companies that do business overseas, or foreign companies to prevent shocking moves to your portfolio."

If you want to contribute to your portfolio more aggressively during the stock market's dip to take advantage of discounted share prices, Boneparth says you have to be comfortable with the risk. "If you're interested in taking advantage of buying at a lower price, you need to be OK if that price continues to fall. Only invest what you're comfortable with." 

Too many people sell when things are low and buy when things are high, and that's the complete opposite of what you should be doing.
Carolyn McClanahan
certified financial planner

3. How often should I check my accounts?

To avoid acting out of fear and making decisions fueled by emotions, don't check your accounts too often. "Long-term investments only need to be looked at once a quarter. See if it needs to be rebalanced, but don't sell," says McClanahan.

Boneparth also says that investors should avoid frequently logging into their investment accounts. "If you're worried, just remember you'll likely have 30 or more years to invest this money. You'll experience situations like this again in the future, so it's important to maintain the long-term perspective." 

When you're due to check in, if you feel the need to shift to a more conservative strategy to calm your nerves, McClanahan says it's OK to rebalance. In general she recommends young investors have a portfolio with 80% stocks and 20% fixed income, which includes "safer" investment vehicles like bonds. If you are looking to protect your money from volatility, move a bit more than 20% into those safe assets, she suggests. 

Why you shouldn't panic when markets are bumpy

Video by Stephen Parkhurst

4. What if the market keeps swinging?

The 2010s were full of record-breaking highs, so if you're a relatively new investor, it's likely that you've never experienced the kinds of sharp drops the U.S. has seen in recent weeks. "Ups and downs are part of the risk you take when you invest in the market, but when you have a long-term time horizon, that risk is well worth staying invested," McClanahan says. 

Instead of pulling money out, be strategic about how you're allocating your investments to achieve your long-term goals. For example, if your goal is to save for your child's college education, and that's 15 years away, maybe pick a fund that will optimize performance over the next 15 years like a target-date fund. Those are made up of a mix of investments that changes over time, depending on when you plan to withdraw your money, McClanahan suggests. 

Overall, "it's important to remember you have time on your side and you can withstand volatility and recessions, as long as you stick to your plan," says McClanahan.

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