Blog, Financial Planning, Investment Ideas, Market Timing

Smart Investing in Turbulent Times: Strategies to Preserve and Grow Your Wealth

Photo by Maria Lupan on Unsplash

Economic turbulence can be a source of anxiety as well as a window of opportunity. For the informed investor, turbulent times present opportunities to refine strategies that safeguard and grow wealth.

What is market turbulence?

Stock market turbulence refers to a period of instability and unpredictability in the stock market. When the market experiences turbulence, prices fluctuate rapidly, and investors may experience significant losses or gains.

During this time, investors may experience heightened anxiety, uncertainty, and a tendency to overreact.

When markets are turbulent, investors may shift funds to more conservative assets, increasing trading costs.

Market turbulence can last weeks or months until the market stabilizes and confidence returns.

What causes market turbulence?

Several factors can cause stock market turbulence, like political instability, economic uncertainty, and global events.

For example, the COVID-19 pandemic significantly impacted stock markets worldwide, as investors became worried about the potential economic fallout.

Geopolitical tensions between countries can also lead to market volatility, as investors worry about the impact on trade and economic relations. These events may include a military conflict (like Russia’s invasion of Ukraine) or increased tensions between countries.

Changes in interest rates or monetary policy can also affect stock prices as investors adjust their expectations for future economic growth and earnings.

Surprising economic news that differs from expectations, like signs of higher inflation,  may cause markets to react.

Sometimes, markets react to the perception that a sector is overvalued, like 2000 when technology stocks sold off dramatically.

How to deal with market turbulence

When the stock market is turbulent, there’s a temptation to take action.  Instead, consider this sage advice from Vanguard Group founder Jack Bogle: “Just stay the course. Don’t do something, just stand there. This is speculation that we’re seeing out there, and you can’t respond to it.”

              Stick to your plan

There’s compelling evidence that making an investment plan and sticking to it, regardless of market events, can potentially be a winning strategy over the long term.

It’s easier to follow this advice and not panic when the market tanks if you have a historical perspective.

According to Charles Schwab, The average duration of a bear market is 446 days, but bull markets have historically been longer, averaging 2,069 days.

A bear market has had an average decline of about -33%.  Understandably, investors find this deeply upsetting.

But what if you stayed the course and did nothing?

You would reap the rewards of a bull market which historically had an average increase in value of 209.2%.

There’s no way to predict future market cycles, but this historical perspective may be helpful.

              Review your risk tolerance

When the market tanks, the loss in value of your portfolio is unrealized unless you sell.

Ideally, when you determined your asset allocation (the division of your portfolio between stocks, bonds, and cash), you considered your ability to withstand a downturn.

Stock market turbulence can test whether your allocation is correct.  If you feel emotionally stressed, this might be an excellent time to consider a more conservative stock allocation.

              How volatile is your portfolio?

Investors can sometimes be surprised by the amount of the loss in value of their portfolio during periods of market turbulence.  A common refrain from these investors is: “I didn’t realize I had such a risky portfolio.”

Don’t wait until there’s a bear market to ensure your portfolio is globally diversified with an appropriate allocation to more conservative investments, like short-term bonds.

              Increase your emergency fund

More liquidity can be a source of comfort when your portfolio declines in value.  If you have three months of savings, consider doubling or tripling it.

You may not need it, but knowing it’s available could help you avoid making an impulsive decision about your stock holdings.

              Seek help

Perhaps a financial advisor’s most essential function is managing client behavior, especially during turbulent times.

Here are some additional benefits financial advisors can provide during periods of market volatility:

Provide perspective:  Advisors can help clients take a long-term view and not overreact to short-term volatility. They remind clients of their financial plans and goals.

Rebalance portfolios:  Advisors regularly rebalance portfolios to target allocations, selling assets that have outperformed and buying assets that have underperformed.

Provide reassurance: During turbulent markets, advisors can be a calming influence and reassure clients that volatility is normal market behavior.

Adjust financial plans:  Advisors can make appropriate adjustments to financial plans and portfolios based on changing market conditions and client needs

Ongoing education: Advisors continually educate clients on managing emotions and expectations during volatility.

Final thoughts

You can better navigate turbulent markets by understanding the causes of market volatility, maintaining a clear and informed perspective, and seeking guidance when needed.

The key is to remain anchored to a well-crafted investment strategy and to seek help when you aren’t comfortable “staying the course” on your own.

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.

 All investing involves risk, including loss of principal. No strategy ensures success or protects against loss.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

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

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Stock investing includes risks, including fluctuating prices and loss of principal.