Tariffs, trade wars, rate hikes, inflation, global conflict, rising oil prices, AI valuations, layoffs. The last few years have seen market volatility become the norm. Some of it has been driven by a global market experiencing significant geopolitical and economic shifts. And some of it is driven by a 24/7 news cycle that adds urgency to every headline and helps fuel sudden swings. Yet it's also true that volatility is a natural part of financial markets. It's not unique to the times we live in.
What is unique to the present, however, is the quickness and the intensity with which markets can move. We live in an always-connected state with around-the-clock access to platforms publishing and amplifying real-time headlines. By contrast, twenty years ago, most people still got their news twice a day via the daily paper and broadcast news.
But while markets and headlines may move quicker than in the past, how we manage volatility has remained steady, mirroring the guidance to stay disciplined during swings and avoid reactionary decisions that can sacrifice healthy, long-term performance for short-term relief.
Daily Headlines Don't Reflect the Larger Story
News of war in the Middle East will impact oil prices. Headlines of a peace treaty will push them in the opposite direction. A new AI model launches tech stocks. Government regulation brings them back to Earth.
Headlines have the power to move markets. That's especially true in an environment where news can act like an echo chamber – the same stories are copied, repeated, shared, and amplified in a concentrated burst, making it feel like the news must be critically important. But what's also true is that those stories have very short shelf lives. Often, they are replaced in a few days by the next "big" story.
Unfortunately, these short-term headlines can feel seismic and create urgency with investors. As they read screaming headlines and watch the markets move in response, they feel they need to do something – buy, sell, trade, pull back. Grab onto the upswing or escape the downfall. This reactionary behavior isn't in the best interests of the average investor, most of whom invest for retirement rather than day trade.
Retirement planning doesn't focus on snapshots. It considers the big picture. Over a decades-long horizon, disciplined investing is rewarded with steady appreciation. Having a well-built, diversified portfolio can create resilience to volatility, help moderate extreme highs and lows, and keep you on track to reach your long-term goals.
The Best Advice Is Boring but Effective
Sometimes good financial advice feels a lot like watching water boil. It can seem like not much is happening because the water isn't responding to a sudden shot of intense heat. Instead, it's gradually warming up, little by little, until you have something you can cook with. For a casual observer, it can be painfully boring, but it serves its purpose.
The best financial planning operates in a similarly boring but effective way. Gains are gradual and purposely avoid extreme spikes. Constructing and coordinating portfolios to perform as desired requires experience and expertise. However, there are a few basic tenets to consider when looking at your financial plan:
Diversification: Different assets respond to the same event differently, sometimes in opposite directions. Strategic diversification can help mitigate the effect of big swings in either direction. Importantly, diversification reduces risk; it doesn't eliminate it. Diversification can occur across multiple layers:
- Asset class: stocks, bonds, cash, real estate, commodities
- Sector: tech, healthcare, energy, financials, utilities
- Geography: domestic, international, emerging markets
- Market cap: large-cap, mid-cap, small-cap
Discipline: Financial plans are created to be followed. They are intentionally tied to your long-term goals, timeline, and risk tolerance, among other factors. They include an investment strategy that accounts for market volatility. Plans should indeed be revisited and updated regularly, but those changes should be based on market data rather than headlines, and changes tend to be intentional instead of aggressive.
Regular Reviews: Annual and mid-year reviews help ensure that your plan is aligned with your current situation and long-term goals. Changes to your job, family, living situation, or risk tolerance can change your portfolio construction and how it reacts to volatility.
This is also the time to discuss with your advisor if you're feeling anxious about headlines and market swings and ask questions about whether your portfolio is built to withstand geopolitical and economic events.
Tax-Aware Planning: It's natural to want to do something when you see markets dropping and your balance following right behind it. But overreacting can have consequences that impact you beyond a temporary dip. Selling positions can trigger tax events. There may be times when it's wise to move toward or away from specific stock, or to rebalance your portfolio, but it should be done with an eye toward tax efficiency to avoid unwanted surprises come filing time.
A Good Advisor Can Help Keep Things Even Keeled
Volatility has always been a part of financial markets. However, our shrinking, always-connected, digital world has made markets more sensitive and responsive to geopolitical and economic events. That's unlikely to change anytime soon. As a society, we probably need to get better at not reacting or overreacting to every headline. As investors, we absolutely need to refrain from making reactive financial decisions that will impact our long-term goals.
With market volatility, a good advisor often plays two key roles. Working closely with you, they can construct a thoughtful, purpose-built portfolio designed to meet your long-term goals and endure market swings. But they can also serve as the voice of reason, an experienced guide that answers your pressing questions, reassures you of the strength of your plan, reminds you of the value of sticking with it, and is willing to have honest conversations about market shifts.
If you want to review your plan and ensure it's designed to account for market volatility, let’s talk.