An Investor’s Guide to Market Volatility

Aerial shot of windy Road

Knowing what to do during a market downturn can be especially difficult in the moment, here’s how to plan ahead.

In this guide, we’ll cover:

  • What market volatility is
  • How to prepare for it
  • What to do about it

What is market volatility?

Nobody likes to see their finances take a nosedive. But in a volatile market, dips happen often.

Market volatility refers to fluctuations in the price of investments. Some markets—like the stock market—fluctuate more than others. And in times of economic stress, markets tend to be even more volatile, so you might see some big ups and downs.

It’s tempting to sell everything and bail out during dips, but that often does more harm than good. Selling your assets could lock-in losses before they have a chance to rebound from the dip, and it’s nearly impossible to predict the market’s high points and low points.

Historically, the stock market has had plenty of bad days. In any given decade, you’re bound to see many drawdowns, where investment values dip frightfully low. But when you step back and look at the big picture, the market has trended upward over time.

History shows us that experiencing short-term losses is part of the path to long-term gains.

The key for investors is to expect market volatility. It’s inevitable. And that means you need to prepare for it—not simply react to it.

How to prepare

Market volatility can occur at any time. It is important to be ready for it now and in the future. The main thing you can do to prepare is to diversify your portfolio. Having a balance of different types of assets decreases your overall level of risk. While some of your assets momentarily struggle, for example, others may hold steady or even thrive. The goal is that your portfolio will hopefully feel less like a rollercoaster and more like a fun hike up wealth mountain.

Beyond that, you’ll want to strongly consider building an emergency fund. A good starting point is having enough to cover three to six months of expenses. This is money you want on hand if market volatility takes a turn for the worse.

What Investors should do during downturns

Caught in a downturn? Don’t panic. When the market looks grim, the best reaction is usually to do nothing. Selling off your portfolio to prevent further losses is a common investor mistake that does two things:

  1. It locks-in those losses
  2. It takes away your chance to rebound with the market

Scratching an itch usually won’t prevent it from recurring. The same goes for reacting to short-term losses in your portfolio. As much as you can, you want to resist the urge to react.

Follow your plan

It’s easier to stay the course when you know your team has your back. Our automated features help make the road a little less bumpy:

  • Portfolio Rebalancing: We keep your account at your preferred ratio of stocks to bonds.
  • Tax-Loss Harvesting: We help you take advantage of downturns by offsetting capital gains. This has the potential to lower your tax bill and increase your after-tax returns.

Are you ready for market volatility?

Investing involves risk. Performance not guaranteed.