Keeping on Track in a Volatile Market

Don’t panic when the market misbehaves. Instead, take stock of your financial plan, your goals and your stage in life.

While it’s not uncommon for the stock market to zigzag up and down, it’s rare to see extremes like we did in 2020. But whether that wild ride kept you awake at night worrying about your portfolio or caused barely any concerns, periods like this provide a good opportunity for checking in on your strategy—and your goals—to make sure they’re where you want them to be.

The first thing to do? Think. Don’t panic or start tinkering with the portfolio asset allocation you set up before the roller coaster ride. Instead, consider your strategy and goals. “It’s important to recognize that while investing is rational, money is emotional,” says Jennifer Suden, Vice President and Portfolio Manager with Regions Asset Management.  “Your first line of defense is to make sure your portfolio already has the appropriate levels of stocks, bonds and cash in place for your unique circumstances and tolerance for risk.” Use the recent volatility as a litmus test: If the change in the value of your portfolio weighs on your mind, perhaps your asset allocation is too aggressive. Using historical data and forecasts, Regions Private Wealth Management can help you determine what the right asset allocation is for your phase of life and customize it to your needs and wants.

Here are key ideas to consider based on which stage you’re at in your financial journey.

JUST STARTING OUT: STAY THE COURSE

If you’re in your 20s or early 30s, hang in there and stay invested, as you have ample time to wait out periods of volatility. In fact, you might consider investing more when stocks are down, Suden says. Subsequent five-year returns after bear markets range from 78% following the 1973 oil crisis all the way up to 272% after the Great Depression in the early 1930s,¹ and that’s not including dividends.

MIDLIFE: FOCUS ON PRIORITIES

If your investments have taken a big hit while you’re juggling larger, more long-term expenses, such as your children’s education, a mortgage and saving for retirement, you may need to play defense. And that means focusing on your most immediate needs first.

One important defense: keeping enough cash in savings to cover six months’ worth of living expenses, so if your income is unexpectedly decreased, you won’t have to sell investments to get by.

APPROACHING RETIREMENT: ASSESS YOUR RISK

When nearing retirement, the transition from a strong focus on growth to a focus on both growth and income means you may have to start rethinking your allocations. You can’t stop volatility, of course, but you may be able to limit the risk it poses to your portfolio by adopting a more conservative stance, Suden explains. Think about further diversifying the asset classes in your portfolio to include those whose movements tend to have a lower correlation to equities, such as bonds, cash and even alternative investments. The timing of this asset-allocation shift, however, is crucial for someone nearing retirement. It’s better to refrain from drastic changes until equity markets make a reasonable rebound. “You don’t want to sell a substantial portion of your stocks until there has been some level of recovery— or you risk turning significant, temporary losses into permanent ones,” she says.

RETIREMENT: PLAY IT SAFE

If you’re retired and dependent on your assets for income, a portfolio heavier in fixed-income investments may fare better during extreme volatility than one predominantly in stocks. But it’s important that you still have some exposure to the latter to achieve the growth necessary to counter inflation.  She encourages investors nearing retirement to consider the following actions during periods of extreme volatility:

• Reduce how much you harvest from your investments, both taxable and tax-advantaged. The less you sell, the greater the likelihood of your portfolio recovering when the market improves. This may mean tightening your belt for a period of time but will likely benefit you in the longer term.
• Ensure you’re taking advantage of tax-saving opportunities. This year in particular, you can forego any required minimum distribution from your retirement plan, which would have been taxed at ordinary-income levels. Additional examples include tax-loss harvesting and, in certain situations, converting part of a traditional IRA to a Roth IRA.

¹ Prepared by Regions Asset Management using data from Morningstar.

This information is general in nature and is not intended to be legal, tax, or financial advice. Although Regions believes this information to be accurate, it cannot ensure that it will remain up to date. Statements or opinions of individuals referenced herein are their own—not Regions’. Consult an appropriate professional concerning your specific situation and irs.gov for current tax rule.