How to Handle Market Volatility at Every Stage of Life
Hey, everyone! In past posts, I have discussed the importance of tuning out the noise when it comes to investing. For this month’s post of our Investing Basics Series, I want to take a deeper dive into what “noise,” or market ups and downs, means at different ages/stages of life.
I want to talk about this subject because there has been a lot of market volatility this summer alone, let alone the past year. The S&P 500 broke record highs just a few weeks ago, to immediately taking a nose dive afterwards. With the impending Trade War with China and other political turmoil, it’s been a whirlwind of a summer and makes looking towards the future a little nerve racking. What does all of this mean for you, the investor?
Canceling out the noise of investment news is easier, even necessary when you’re in your early 20s through your late 30s because your investment time horizon is long enough where you can weather market volatility. But when you start getting closer to retirement, you have more to lose and less time to recover from the downs of the market.
When you’re in your 20s and 30s, what matters the most when it comes to saving and investing, is NOT what your market return is, rather it’s the RATE at which you should be saving your money. At this age, it’s best if you can save 10-15% of your gross income. You want to have cash in a high interest yielding savings account for emergencies, and then you should put money towards your retirement accounts and taxable accounts.
At this age, you have a long time horizon of investing your assets before you’ll need them in retirement, because of this, a good asset allocation for your portfolio is having 80-90% of your investment in stocks and 10-20% in bonds. Stocks will allow your money to grow and bonds will help balance out your portfolio and provide some income.
You can also use market volatility to your advantage. The old saying, “buy low, sell high” can be fully utilized during a bear market (A bear market is when securities prices fall 20% or more). Even when you contribute to your 401(k) during a bear market you are taking advantage of this low-cost market.
However, during a bear market it is important that if you are planning on making a big purchase - home, car, etc - within the next year, don’t invest those funds in the market, rather keep those savings in a high-interest savings account or a CD.
At this age, you’re better off letting your assets grow whenever the market takes a downturn,
When you’re in your 40s and 50s, retirement isn’t just a thing in the inevitable future, it’s something that is (hopefully) looming near. It’s becoming a little harder to ignore market volatility because you have a bigger nest egg you’re sitting on with a shorter amount of time to grow it.
With that being said, you still have 10 plus years until retirement, which means there is still time for you to ride out a bear market. And you can still be high risk with your asset allocation of 80-90% stocks and 10-20% bonds. As you get closer to your late 50s, you can start decreasing the riskiness of your portfolio to a more moderate 60-75% in stocks, and 25-40% bonds.
It’s important at this age whenever the market becomes volatile, to NOT sell securities at the bottom of a bear market. Selling low is the worst thing you can do at this age. You risk losing a lot of appreciation.
After the 2008 crash, the S&P 500 plunged 56% and it took about 1-3 years to fully recover with an asset allocation ranging from 50/50 stocks and bonds, to 100% stocks, according to Vanguard. The market didn’t even bottom out until March 2009 because investors took out over $500 billion dollars from US stocks and put $1 trillion dollars into bonds, according to the Investment Company Institute. But after hitting bottom, we’ve been in a 10 year long bull market (a bull market is where securities prices are rising).
As always, it’s important to have a cash reserve to cover upcoming expenses and emergencies.
Fun Fact: To remember the difference between bull and bear markets, bulls thrust their horns up, causing prices to rise, whereas a bear swipes its paws down, causing prices to decrease.
60s-70s and Retirement
At this age, it’s time to start reducing risk and building your cash reserves. You want to have at least 2 years worth of living expenses in cash, that way if the market declines, you won’t need to dip into your portfolio at reduced prices.
In 1980, the average life expectancy for men was 79 years and the average life expectancy for women was 83 years. Now, the average life expectancy for men is 83 years, and for women it’s 86 years. When we create financial planning models for clients, we plan for clients to live even longer than that. Because we’re living longer, at this age, you might have another 2 to 4 decades worth of spending to cover. So, it’s important for you to build a sustainable retirement budget and it’s also important you should try not to let your temptation to cash out your life savings if the market takes a downswing during this time.
If you keep 40-50% of your portfolio in stocks during retirement, you’re more likely to fund your retirement lifestyle for longer because a sizeable chunk of your money will still be growing. Consider multiple income-producing assets at this age (really, at any age) as well, such as real estate, a part-time job, or dividend-paying stocks to help pad your retirement cash flow.
If you’re really worried about not going broke during this time of your life, consider breaking up your investments into 3 categories:
- This is to cover any expenses you may have in the next 5 years
- Cash and CDs
- Moderate risk portfolio that can grow for the next 15 years
- IRAs, Taxable Accounts
- This can be invested in a more aggressive portfolio, that can grow for the next 16+ years
- IRAs, Roth IRAs
Being an investor during volatile times can be nerve-racking and a little scary. But all we can do is use the data we have in order to make smart choices for our future. Historically, the stock market has always been volatile and it has always recovered after a downturn. Our last recession was the biggest recession in US history and it last eighteen months, but then we went on to rising stock prices for a decade. The recession before 2008, was in 2001 and it only lasted 8 months. And we haven’t had a depression since the Great Depression and that was 90 years ago.
My point is, it’s important to keep perspective when it comes to the market. Investing is not for the faint of heart, but if you remember that even though the ups and downs of the market might be unpredictable, it’s predictable that there is going to be volatility - nothing lasts forever, even a recession.
We would love to hear from you, so if you want more in-depth advice about asset allocation, portfolio management, or retirement/estate planning, call or email us, or sign up for a Get Acquainted meeting today!