Many people shy away from investing in a down market or from the stock market in general out of concern that they’ll lose their nest egg. While those concerns are justified, a sound investment strategy can help guard against future market volatility.
It helps you pursue your financial goals and invest in your retirement. It also enables you to recognize each bear market as an opportunity and a natural part of the investing life cycle.
In this blog post, we’ll walk you through:
- The difference between market volatility and investment risk
- Investment strategies before and during a bear market
- The right mindset and support to help you during market volatility
- Expectable market rhythms and how you can use them to your advantage
Differentiating between market volatility and investment risk
When investing for retirement, you want to know that you’re accumulating wealth. If you panic during normal stock market fluctuations, you may be tempted to unnecessarily take your money out of investments, increasing your risk of financial loss. Therefore, your financial future depends on you to understand the difference between typical market volatility and investment risk.
When we speak of market volatility, we usually mean the expectable degree of fluctuation in the value of an investment, like a stock or a bond. How volatile an asset or a stock market sector is depends on various factors, including overall market conditions, recent headlines and geopolitical events, market liquidity, or investor sentiment.
Due to the significant changes within only short periods, volatile assets might often seem attractive investments because of the potential for higher returns. However, those assets also carry the potential for more substantial losses than more conservative choices.
While advisors will use market volatility as one metric to predict investment risk, they complement it with additional components to assess investment options and the possible capital loss. Industry-specific risks, regulatory changes, portfolio diversification, personal risk tolerance, and investment horizon also play into evaluating investment risk.
You should also be aware that you can’t assess your assets once and forget about them until retirement. Monitoring your investment portfolio continuously, especially during uncertain times, is crucial. Your Marsh McLennan Agency advisor will gladly assist in translating your financial goals into a personalized portfolio and provide ongoing advice to ensure it aligns with any necessary adjustments that life brings.
Strategies for investing before and during a bear market
The ups and downs of the stock market can be stressful, even if it’s not a bear market. If you prepare sufficiently for any downtrends through a sophisticated investment strategy, there’s less need to worry. You can follow your plan, even during the bear market, because the program will already factor in those long-term fluctuations.
The best way to guard yourself against hectic stock market volatility and panic buyouts is to spread your investments across different assets and sectors beforehand. A diversified portfolio can help soften the blow of a bear market. While single investments might drop in value, others might rise, thus compensating for your losses in the short term.
A tried-and-true investment strategy like dollar cost averaging takes the guesswork out of investing, even during a crisis. With dollar cost averaging, you commit to investing a fixed amount of money at regular intervals over time into a group of assets. That way, the amount invested is less affected by market conditions and timing. For example, you might benefit from a recession as you buy more shares when the stock price is low.
In tough times, more conservative industry sectors like utilities can perform better than more speculative ones. Work with a Marsh McLennan Agency advisor to review your asset allocation and rebalance your portfolio based on your retirement goals. Depending on your risk tolerance and investment horizon, your advisor may temporarily choose to reallocate your investments.
The right mindset for investing: staying calm in times of volatility
Reactive investing is the perfect recipe for chaos. You’ll likely panic and hurt your investment strategy if you base it on the latest headlines or recent stock market events.
If you’re in doubt about an investment decision or if your circumstances have changed, causing you to be more or less risk-tolerant, it’s best to discuss those issues with your Marsh McLennan Agency advisor. Referring to a seasoned professional will allow you to take the guesswork out of your current financial situation.
Learn to assess the market and its natural rhythm properly
While the phrasing may suggest that bear and bull markets are just part of one enormous wave, assessing each market trend individually shows that we must adapt each time.
Specific patterns and metrics allow you to assess stock market volatilities. Overall economic conditions in the world market may affect your investment just as much as national monetary policy or the decline of one industry. However, the insights you can gain based on historical evidence and market behavior won’t guarantee future results. Some bear markets affect the world economy, while others only affect one or two industries. The time frame and the effect on private investors will vary from one bear market to another.
For instance, after the 2008 housing bubble, the market took two years to recover. It took even longer after the dot-com crash. The market didn’t bounce back for over 10 years after the Great Depression. While these events affected the world, it’s worth pointing out that they significantly impacted the U.S. economy. A balanced international portfolio would have outweighed the potential losses that could have occurred.
Understanding current financial trends is important to help protect your retirement savings even during a recession. Our advisors have experience and market expertise to help you tailor an investment portfolio to your unique needs.
Contact a Marsh McLennan Agency financial professional today to learn more about the right approach for your personalized portfolio.
