Investors panicked in April after President Donald Trump announced sweeping new tariffs. Fears that the levies would reignite inflation and spark a global trade war drove a 19% top-to-bottom decline in the S&P 500.
Trump followed with a series of months-long pauses on many of the tariffs. The market shook off the initial shock, and things have been relatively placid since. Even after a new round of tariffs went into effect in August, and even though the Federal Reserve has yet to slash interest rates as many investors had hoped, the broad U.S. stock market is up more than 8% so far on the year.
But don’t expect the smooth sailing to last forever.
“We’re going to see volatility,” Wei Li, chief investment strategist at the BlackRock Investment Institute told CNBC Make It shortly after the midyear mark. “We’re going to have headlines creating a lot of uncertainty and markets have the tendency of being carried away one way or another, both on the downside and on the upside.”
Rather than getting caught up in the hubbub when things get choppy again, make a plan now that will allow you to navigate the next bout of market volatility, says Roger Young, thought leadership director at T. Rowe Price.
“It’s a good approach to get out in front of things,” he says. “But be careful not to overreact to what might happen [in the future].”
How to prepare yourself for market volatility
It’s easy to stick to your investing plans when market is steadily climbing. But when things start to get jumpy, emotions can take over, driving investors to make rash decisions, such as panic-selling stocks during a sharply down market.
“The important thing is avoiding those overreactions or avoiding overly emotional decisions,” says Young. “You need to try to be honest with yourself and say, ‘What would I do if the market was down 30%? Would it affect the way I live? Would it make me want to sell and kind of capitulate at the wrong time?'”
The answer to questions like these can help determine your risk tolerance. Online questionnaires, such as this one from Vanguard, can also help you understand how you emotionally handle a potential loss in your portfolio.
Understanding your risk tolerance is crucial because examining your relationship with risk and how your investments align with it can help you avoid emotionally driven decisions down the road, experts say.
It may also behoove you to work with a financial planner, who will be able to walk you through how your portfolio would react under different market conditions and make personalized recommendations based on your goals.
“Asset managers have tools today that can look at 20, 30, 50 different kinds of scenarios and stress-test a portfolio and ask, based on all of the underlying holdings, how will this portfolio behave if X, Y and Z occurs,” says Paul Brahim, a certified financial planner and president of the Financial Planning Association.
Generally speaking, the higher your tolerance for risk — i.e. you’re unlikely to sell and would even buy more of an investment if things got bad — the more of your asset allocation can be devoted to more volatile assets, like stocks, investing experts say. The lower your tolerance, the more you should be invested in more conservative holdings, like bonds, that are likelier to hold their value.
If the thought of a significant slide in the market keeps you tossing and turning at night, it may make sense to sell some of your riskier investments and add to your conservative ones, says Young.
But keep adjustments to trims, rather than wholesale changes, he adds. “We’re talking about a range of maybe 10 points. We’re not talking about, ‘I want to go from 70% to 10%.'”
Embrace volatility if you can
The reason you should trim, rather than hack at your portfolio has to do with what investing pros call risk capacity. While your tolerance for risk is tied to emotion, your capacity is tied to your age and goals.
If you’re 22 and investing for retirement, you can afford to undergo major losses in your portfolio, with the assumption that things will have decades to recover and continue growing. If you plan to retire and start living off your portfolio this year, a 50% decline in the stock market is a huge blow to your lifestyle in retirement.
In short, the sooner and more important your goal, the less volatility your portfolio can withstand.
Even if you’re young and still decades away from a long-term target, you may still feel queasy about risk — and that’s worth discussing with a financial advisor. But if you can stomach it, volatility can be a plus for younger investors, says David McInnis, a certified financial planner and managing partner at Aristia Wealth Management.
“In the scenario of markets going lower due to volatility, that’s a gift, in my opinion, to the younger person,” he says.
That’s because stock market declines present an investor with the opportunity to buy at lower prices, thereby increasing their long-term returns. But rather than just trying to buy when prices are low, the true key to navigating volatility is to be buying all the time.
“The great equalizer to market volatility is dollar-cost averaging,” he says, referring to a strategy in which investors put a set amount of money into markets at consistent intervals. In doing so, he says, you can effectively ignore short-term news about the market while ensuring you buy more shares when stocks are low and fewer when they’re high.
“Maybe it’s not new and innovative,” McInnis says. “But it is extremely effective.”
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