How to Navigate Market Volatility

Matt addresses major client concerns about managing portfolios in a market volatility. He shares a client’s example, who missed the opportunity to grow their investment from one and a half million dollars to over two and a half million dollars because they shifted their investment to cash during the Trump and Clinton election and never reinvested.

Matt highlights the challenge of timing the market, noting that even the most skilled investors cannot consistently predict market entries and exits. He mentions research from Dalbar, which found that emotional decision-making leads to the average investor earning about half the overall return of the stock market annually.

To counteract this, Stevenson emphasizes the importance of building a comprehensive, rules-based plan designed to withstand all market conditions. He suggests utilizing various investment tools and strategies, including investments in stocks, bonds, real estate, commodities, and international investments, to achieve success and stability in investment portfolios.

How to Navigate Market Volatility

In today’s financial landscape, market volatility has become a common concern for investors. Whether you’re a seasoned investor or just beginning to build your nest egg, the ups and downs of the stock market can leave you feeling uncertain and apprehensive. This article aims to address some of the major concerns surrounding market volatility and provides strategies for navigating your portfolio through turbulent waters.

The Cost of Market Timing

To illustrate the perils of market timing, let’s consider a client example. A couple had accumulated a respectable nest egg of one and a half million dollars through years of diligent saving and investing. However, their financial history was marred by a significant misstep: they decided to move their investments to cash before the Trump and Clinton elections, and they never re-entered the market.

This decision had severe repercussions. Had they stayed invested alongside the S&P 500, their one and a half million dollars would have grown to over two and a half million dollars today, even after accounting for the market’s recent downturns. This story underscores the challenge of timing the market and the potential pitfalls of trying to predict market movements.

The Emotional Roller Coaster

One of the most significant challenges investors face during times of market volatility is the emotional roller coaster. When we see our hard-earned nest egg decline in value, fear and uncertainty can drive us to make impulsive decisions. The temptation to move everything to cash can be overwhelming, as we wonder when the bleeding will stop and whether more losses are on the horizon.

It’s not uncommon for investors to react emotionally to market fluctuations, and this can lead to poor decision-making. The desire to time the market, getting in and out at just the right moment, is a siren’s call that has led many investors astray. Even the most celebrated investors in history have been unable to consistently time market entries and exits.

The Danger of Market Timing

Attempting to time the market can lead to a dangerous cycle. If you sell everything to cash based on timing, you must grapple with the question of when and how to re-enter the market. As our client example demonstrates, for many individuals, that opportune moment may never arrive.

This cycle of attempting to time the market, followed by fear-driven decisions to remain in cash, can result in missed opportunities and significant financial setbacks. To navigate market volatility effectively, we must move away from trying to predict market movements and focus on creating a more resilient investment strategy.

The Perils of Emotional Decision Making

Year after year, regardless of market conditions, research conducted by Dalbar has revealed a startling trend: the average investor consistently earns around 50 percent less than the overall return of the stock market. This underperformance is not due to a lack of financial education, savvy investment strategies, or even advisor fees. Instead, it can be attributed to emotional decision-making.

When investors are subjected to the relentless ups and downs of the market, emotions often take control. The fear of losing more money during market downturns and the fear of missing out on potential gains during upswings can lead to impulsive actions that hinder long-term financial success.

Building a Comprehensive Investment Plan

To protect your investments from the emotional turmoil of market volatility, it’s essential to build a comprehensive investment plan. Such a plan should be designed to weather all market conditions, whether they are good, bad, or ugly. A key component of this plan is a rules-based mathematical approach to investing.

This approach eliminates emotional decision-making from the equation as much as possible. By adhering to a set of well-defined rules, investors can make rational decisions based on their financial goals and risk tolerance rather than reacting to market fluctuations.

Diversification and Asset Allocation

A robust investment plan also involves diversification and asset allocation. It’s crucial to utilize all the tools available in your financial toolkit, including stocks, bonds, real estate, commodities, international investments, and even cash. Diversification can help spread risk and reduce the impact of market volatility on your portfolio.

Contrary to conventional wisdom, you don’t need to have all your assets invested in the stock market to achieve financial success. Diversification allows you to balance risk and return by allocating your assets across various asset classes. This approach can help protect your investments during market downturns while still allowing for growth during bull markets.

Seeking Consistency and Confidence

In conclusion, navigating market volatility requires a disciplined and well-thought-out approach. Emotional decision-making, driven by fear and greed, can have a detrimental impact on your investment portfolio. Instead of trying to time the market, focus on building a comprehensive investment plan that incorporates diversification and asset allocation.

If you find yourself on an emotional and monetary roller coaster with your life savings, consider seeking professional guidance. Financial advisors can help you create a plan tailored to your financial goals and risk tolerance. With the right strategy in place, you can approach market volatility with confidence and navigate the turbulent waters of investing more successfully.

At Allied Wealth, we are here to assist you in achieving your financial objectives and ensuring a secure future. Give us a call, and we’ll work with you and your family to create a customized plan that allows you to navigate market volatility and spend your most important years with confidence. Your financial success is our priority, and we are ready to help you achieve it.

Also read: How To Shift From Accumulation To Income Mode In Retirement


Our Channel “ ON THE MONEY“, is powered by Allied Wealth, Houston’s premier wealth management and financial planning firm. On the Money brings viewers educational, topic-driven, and real-life financial scenarios every week.

Topics we will be covering are Retirement and Financial Planning, Investment Selection, Retirement Income Planning, Taxes and Taxation during Retirement, Healthcare, Long Term Care, Legacy and Estate Planning, in addition to important Market and Economic changes impacting Retirement.

Allied Wealth is fully dedicated to your financial future, financial security and retirement.

With Allied Wealth, you will spend less time worrying and more time enjoying the life you’ve earned!