Jerry Z. from Toms River, N.J. asks: Hello Mitch, I’d like to hear your thoughts on the current market volatility and the big pullback. Does the market have further to go? How long do you think this will last? And what should retirement investors do? I know that’s three questions wrapped into one.
Mitch’s Response:
Thanks for writing, Jerry. I’m sure many readers are wondering all of the same things you are, and it’s quite all right you asked three questions. They’re all important.
As I write, the stock market as measured by the S&P 500 has officially entered correction territory, which means a decline of -10% or more. The tech-heavy Nasdaq and the small-cap Russell 2000 index are also well into correction territory. Selling pressure abounds.
This downside volatility is to be expected – over the last 42 years, the S&P 500 has experienced an average intra-year correction of -14.0%, but still finished positive in 32 of those years. In other words, market volatility and corrections are a normal and natural part of equity investing. Remember– while volatility and market corrections are unpleasant, they are not uncommon.
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What To Do When the Market Experiences Downside Volatility
It’s easy to fall into emotional decision-making when the market fluctuates. You may be asking yourself questions like: What should you do when market corrections occur? Could volatility be an opportunity?
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As for how long the market correction will last and how much lower it may go, your guess is as good as anyone. Historically speaking, though, market corrections tend to last a few weeks or a few months, but not longer. They are generally short-term re-pricing events, with the market often recovering in as little time as it took to decline. If the medium-term outlook is for strong economic growth and rising corporate profits – which I believe it is – then fundamentals should ultimately win the day and spur a market rally.
The fact that volatility tends to strike in scary clusters makes this kind of medium-term to long-term thinking very difficult for many investors. We can easily get drawn into intense focus over what’s going to happen tomorrow versus what’s going to happen a year or five years from now. Short-term thinking is emotionally-driven; long-term thinking is data-driven. The latter is an investor’s key to success, especially in times like these.
As for your final questions about what retirement investors should do, it depends on your investment time horizon. Hopefully, you are planning for 20+ years of retirement. With that in mind, it is important to think about your total years in retirement – or your life expectancy – as roughly equal to your investment time horizon. A market correction over a few weeks or months should not materially impact your long-term total return over 20+ years.
Your retirement asset allocation should also help you navigate volatility. If market fluctuations keep you up at night, then it probably makes sense to be thoughtful about how much equity exposure you have in your portfolio. Equities can help you generate the growth you need overtime to help finance your retirement, but they also come with some volatility. It’s all about finding the right balance.
Another piece of advice I would give you with regards to navigating volatility in retirement is to do what you can to ignore it. If investors get swept up in every market selloff or string of negative news in the financial markets, it increases the likelihood of abandoning a long-term strategy and making ‘knee-jerk decisions.’ Having thick skin in the face of volatility is an acquired skill – it takes practice and patience.
At the end of the day, if you invest in a diversified portfolio with equity and fixed income exposure in-line with your long-term goals and objectives, and you stick to your strategy over a long investment horizon like 20 years, you have a high probability of experiencing the outcome you want. It’s all about making your plan and sticking to it.
To help give insight into some ways you can do this, check out our guide, “Helping You Manage Market Volatility.”2 It will provide you with insights and tips to do just that. Get answers to questions like:
If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
Disclosure