Do you remember what happened in the markets in February 2018? They entered into another period of volatility, ending an unusually long phase of stability.
Investors experienced two 1,000-point drops in the Dow, driven by factors such as concerns about inflation overheating. Despite the large swings, February 2018 ended with the markets strongly rebounding.
“Before February 2018, most investors forgot what volatility felt like,” Rich Guerrini, CEO and president of PNC Investments, said. “Many retail investors overreacted and made portfolio decisions out of fear and emotion. Those rash choices had the potential to derail their long-term goals.”
Guerrini stressed that market volatility is healthy and normal, though market gyrations might feel uncomfortable.
The way you react to – and in some cases, capitalize on – market volatility will depend on your time horizon (the amount of time you plan to keep your money invested in the market before you need it). Guerrini outlined how those in different life phases should treat market downturns.
Millennials/Gen X
Younger investors – many of whom came of age during the Great Recession – might be especially spooked by market volatility. If this sounds like you, Guerrini suggested you cast aside your emotions and let cooler heads prevail.
“Millennials and members of Gen X should embrace market volatility,” he said. “While the past few years have been quiet, these demographics are likely to see many periods of market volatility and underperformance during their lifetimes.”
Instead of panicking, Guerrini recommended Millennials and Gen Xers take advantage of their long-term time horizons and practice dollar-cost averaging, an investment strategy in which you regularly purchase an asset at a fixed dollar amount. You could end up buying certain investments at a discount during periods of market underperformance.
Pre-retirees
Investors who are within five to 10 years of retirement should take regular inventory of their portfolios, especially when the markets are volatile.
“People who are nearing retirement need to be aware of the amount of risk they have in their portfolios and, if necessary, consider taking steps to help reduce it when markets get choppy,” Guerrini advised.
Depending on what‘s causing the market volatility, you might need to consider reducing your portfolio’s equity allocation.
“Pre-retirees are about to leave their accumulation years and enter into their withdrawal years. They might consider reallocating their portfolio,” Guerrini said. “Someone who is at the tail-end of their earning years might want to rebalance their portfolio so it consists of 60-70 percent equities – or even less, depending on their goals and risk tolerance.”
Additionally, diversify your equity exposure across various asset classes, understanding that while diversification may not prevent loss, it can help reduce risk.
Retirees
If you use your investment portfolio as your primary or only source of income, you might be tempted to sell all of your equity positions during a market downturn. Guerrini urged you to reconsider.
Assuming inflation runs at 2 to 3 percent per year, a portfolio without equities is not likely to keep pace with inflation.
“With longer life expectancies, it’s entirely possible that your portfolio might need to fund a retirement that lasts 20 years – or even more,” Guerrini said. “Retirees should consider holding equities so they have a better chance of their portfolio growing and outpacing inflation.”
Instead, look closely at your holdings to make sure your equity exposure is diversified across asset classes. At any stage of your investment life, being overly concentrated in one stock or sector could leave you vulnerable if the volatility continues.
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