Stock market volatility? No problem. At least it shouldn’t be if you have a solid financial life plan. They say that volatility (and the discomfort that comes along with it) is par for the investing course. And while this is true, it doesn’t make market dips any less nerve-wracking, especially if you’re nearing retirement age.

The truth is that volatility will only affect you as much as you allow it to. Think of it like a toddler throwing a temper tantrum. If you don’t react emotionally, you and the toddler are likely to make it through the episode with the least amount of damage and residual stress possible.

What do I mean exactly when I say that volatility only hurts you if you allow it? Let me tell you a hypothetical story about a client of mine who was vacationing at the beach with another family over Thanksgiving week one year when the stock market took a momentary turn for the worse. Even though the market dipped and the headlines rolling out were alarming, the client continued enjoying his vacation as if nothing had happened. Why? Wasn’t he worried? No. He was able to continue to relax because he had a plan that he was confident in.

His friend, on the other hand, was frantically glued to his iPad checking market updates and wondering if he should be making any moves with his investments. It’s a possibility his friend did, in fact, make moves—right before the market returned to new highs only days later. So not only did my client’s friend miss out on the vacation he had planned with his family, it’s a possibility that his friend lost some money in the process.

Be Emotionally Prepared for Market Volatility

The truth is that you have to be prepared emotionally to handle market volatility. The well-adjusted investor isn’t concerned with normal market fluctuations. He or she can continue living life and spending money as they usually do.
Now, not everybody (like my client’s friend) has “prepared appropriately.” Here’s a three-point checklist to see if you have done the work necessary to keep your finances on track regardless of what the financial markets throw at us.

1. You Have a Financial Plan That Covers All Your Bases

No financial plan is totally immune to market fluctuations. But there are ways to seek protection against potentially harmful effects. First and foremost is diversification. By diversifying your investments across stocks, bonds, and other financial vehicles, you can strive to feel confident that no single market event is going to jeopardize your long-term security. Why? Because you’re exposed to different sectors of the whole market, all of which rarely (if ever) underperform at the same time.
Secondly, you should aim to have both long and short-term savings “buckets” that you can utilize depending on your age, goals, and how close to retirement you are. Seek a plan that won’t force you to sell assets for cash at a depreciated price during the dip. Strive to keep your money invested to take advantage of the future rebound and seek to mitigate triggering a tax event on the sale of assets.

This combination of diversified assets and healthy savings gives you what we’re all striving for: financial confidence. This setup could provide flexibility that you can use to address potential problems or to take advantage of opportunities that might benefit your overall portfolio.

2. You’re in Control of Your Cash Flow

Where you have the most direct control over your finances is your personal spending. If you’re retired, it’s always important that you spend within the boundaries of your annual withdrawal plan. Younger investors might consider increasing their planned savings contributions during a downturn, especially if you’re counting on that money for a home or auto purchase in the near future.

Sticking to your plan and living within your means are two of the best financial moves anyone can make during market volatility.

3. You Have (or Are Building) a Healthy Relationship with Money

Understanding and working on your relationship with money is arguably the most important relationship you can work on in your life—yes, even more so than the one you have with your spouse, children, boss, colleagues, etc. That’s because the decisions you make with money could directly affect the outcome of your life.

That’s why a big focus of Financial Life Planning is to make folks more aware of what their relationship to money is really like.

For instance, early on in our process, we use interactive tools and discussions to identify how comfortable a person is investing in the markets. Some people are highly skeptical and think “the game is rigged.” At the other extreme are people who have a gambler’s irrational confidence in investing and love “laying their money on the line.” Essentially, what we are doing is using a series of questions as a litmus test to determine your personal risk tolerance for investing before we jump in.
Most folks fall somewhere in the middle. But market volatility can rouse some bad tendencies at both ends of the scale. Market skeptics might pull out their investments and shift too much portfolio weight to cash, bonds, CDs, and other low-yield options that cripple their long-term wealth-building. Gamblers might see “buy low” signs everywhere they look and get in over their heads. There are strategies that both types can put in place to seek to manage their emotions so they aren’t steered in the wrong direction.

Beyond understanding your own relationship with money, one of the greatest ways to address risk is having someone in your life who understands your attitudes toward money. And of course, this is one of the biggest advantages of working with a fiduciary advisor. You always want to consult a professional who knows you, your history, and your goals before you let bad news or scary headlines distract you from a well-thought-out plan.

4. Focus on the Long-Term, Not the Short-Term

It’s true that the past few years have thrown us our fair share of volatility. But investors who try to time their investments to the economic signals of the day are looking at market history through a dangerously narrow lens.
Remember, the ultimate size of your nest egg won’t be determined by one week, one month, or even one year. True wealth is built up slowly, over decades of steadfast saving and investing, careful planning, and thoughtful rebalancing when necessary. Today’s losses might be tomorrow’s gains, or vice-versa.

So don’t let any short-term market worries impact your ability to live and enjoy life the way you currently do. Most of all, don’t let them deter you from all your hard work and planning. We are always available to talk about your specific situation if you have any questions or concerns.

And if you are an investor looking for a financial ally who aspires to help you through the inevitable ups and downs of the market—so you can enjoy life and stop worrying every time the market bats an eyelash—please do not hesitate to reach out. We’d be happy to discuss your possibilities with you.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance referenced is historical and is no guarantee of future results.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

All Investing involves risk including loss of principle. No strategy assures success or protects against loss.