Market volatility is inevitable. There has always been political, economic, and even environmental issues that have caused uncertainty in the stock markets, and there always will be. It is part of the investment process.
Without uncertainty there is no opportunity. Being able to invest in the long-term growth of our economy and the companies that propel it forward is really a great privilege. But you do have to be willing to take some risk in order to reap the reward.
Managing your emotions and keeping a level head during market ups and downs is critical. Even if and when you feel stressed about what’s going on around you, not reacting based on emotion will always fair better over time.
Markets do go down. It’s normal. But they have always recovered and rewarded investors who are patient and disciplined.
Media pundits often try to predict the short-term direction of the stock markets, but this is a fool’s game. You can’t build any kind of strategy around when to get in and when to get out. That would require making the right prediction two times in a row.
What has worked best over the history of our stock markets is having a personalized investment strategy that adheres to your unique goals and risk comfort level, and staying invested through all the market ups and downs.
In this podcast episode, I share 6 tips for surviving market volatility and staying focused on your goals.
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Welcome to the move. I've money girl. Hi, I'm Stephanie Sammons, inexperienced certified financial planner helping women professionals navigate myth life and money. Today. I wanted to bring you a special episode, do
A rebroadcast of the prior episode that I did last June, I think it was, so the middle of 2019 maybe spring of 2019 called surviving market volatility. And the reason I wanted to do this special episode this week and bring this back is because the points that I make in that episode are tried and true and they are really good guideposts for understanding what we're going through. When we go through difficult times in investing and watching the stock markets all over the world become very volatile. The points are things that I want you to hear. Again, you can't hear these things enough and I think he could help you calm down a little bit if you're worried and about what's going on in the markets and the volatility we've been experiencing and then just have it just help you kind of keep a level head about this stuff going forward.
So first though, I want to say, you know, most of us should be taking a long view when we are investing anyway. It doesn't matter if you're in your forties fifties sixties or seventies our biggest risk is not in these temporary market downturns. It is longevity risk. It is living too long and this is the main reason why I encourage folks to really think longer term. No matter what your age is because even if you're in your seventies you could live another 20 years. You can live well into your eighties and nineties today and some folks are even starting to live into their hundreds. I don't think it's too far fetched that that is going to become more and more common with technology and healthcare advances over the next decade. Now that doesn't mean when you take the long view that you put your entire nest egg into growth assets or global stock markets, it means you find the most appropriate allocation for your personal situation.
Now, I am probably not your personal financial advisor unless you are a client of mine listening to this show, but your personal situation is very, very different from anyone else's personal situation and therefore your financial plan and your investment strategy and allocation should reflect that and should be customized to who you are, what your goals are and what we're life is really about. Ultimately, you want your money to outlive you and you also need a way to stay ahead of something that we call inflation. And inflation is simply the fact that prices rise over time. Think about the purchase price of a house or a car 20 years ago compared to today, or even just basic goods and services like groceries and health care costs have risen much faster than everything else. If you keep all of your money in cash or you stick your money in a coffee can or under a mattress and pull it out in 20 years, guess what it's worth.
It's got about half of the value that it had 20 years prior. Inflation erodes your purchasing power over time. And so that is really the main thing that you want to stay ahead of. That's one of the primary reasons for investing in companies that grow their earnings and that serve us as consumers. Now, I've said many times on this show that the secret to being able to endure these market ups and downs in these difficult times is by keeping a cash reserve, a cushion on hand for emergencies or for fixed living expenses. If you lose your job or if something happens to your income and if you're already in retirement, you probably need even more in a cash reserve. In some cases you might need two years worth of expenses in a cash reserve or more. It just depends on your situation, your personal situation and your comfort level.
But the point is we have seen all kinds of challenges over the years that have spooked markets and this market in particular where we are today had become pretty overvalued. It's gone up too far, too fast, and so there is always this tendency to revert back to the mean as we call it, to use a financial term. We're going to continue to see challenges. It's all part of the process of investing. We have been through Wars, we have been through recessions, we've been through natural disasters, political changes, the nine 11 attacks back in 2001 illnesses like SARS, which was very similar to the Corona virus and Ebola. All of these events have caused a draw down, a temporary drawdown in the stock market and as a financial advisor, I have been doing what I'm doing through many of these types of events over the last almost 25 years now.
So I have a pretty good understanding of what that experience feels like and how to best navigate through that experience. But what I can tell you is that corrections in the market and volatility, they're tough to endure in the short term term, but it really is best to power through those times and keep a level head and try not to react emotionally. These drawdowns are scary, but they are a normal part of investing. In fact, in the last 20 years I was looking at some research in the last 20 years, there have been 10% or greater corrections or draw downs in more than half the time over that 20 year period, more than half the years it's been greater than 10% of a drawdown, so it's normal. This is a normal part of investing. It's just hard to keep that in mind when there is panic and fear and the media really doesn't help in that case. Okay. I will stop pontificating about this and let's get to the rebroadcast where I give you tips for surviving market volatility and joy and I hope that you will let these thoughts sink in.
Are you worried about the economy and the volatile stock market? Does it feel like everything is just going crazy around you and does it stress you out? Well, I hope not. I hope that your busy life keeps you away from the news and the media and all that scary stuff that could be going on around you, but I thought it would be a good idea in the midst of the volatile markets right now to talk about a few tips and steps for surviving market ups and downs. These ups and downs are inevitable. There's also currently a threat of a recession. Well, I can promise you this, there will be another recession. No one can predict when that might take place and no one can predict how deep of a recession we may ever enter into economic recessions. Very. Some of them are short and sweet and others have been longer and more enduring.
However, I don't want you to worry about these kinds of things because they really don't have a major impact on your longterm financial situation. If you are doing the right things for yourself. Stock market downturns can be scary, but they're normal and on average, markets declined 10% or more on an annual basis every three to five years. You can expect markets to go down 20% or more. And looking back over history, we have always dealt with political and economic and environmental challenges. So this time is no different. It's just part of the process. The good news is when markets do go down, they have always recovered and it just requires some patience and discipline to stay the course. And of course your financial advisor can help you do that and can help guide you through the difficult times. I can tell you that I have saved many clients over the years from making terrible investment decisions that were based on emotion and fear.
So your emotions can really cause you to behave poorly and make bad decisions sometimes. So it's really important to have a coach or have an advisor who can help you keep that emotional distance from your investments and help you maintain a longer term perspective. And also market corrections offer an excellent opportunity to reassess your financial situation and review your investment portfolio. So I'm going to talk about six steps that can help guide you through market volatility, market ups and downs, economic fears and help you stay focused on your longterm strategy. And it doesn't matter if you are in your forties fifties sixties or seventies because as I've talked about many times on this show so far, you can live a long time. So when I say a longterm perspective, I'm talking five to seven to 10 years out. Okay, I'm not talking 2030 40 50 years out.
So keep that in mind. Step number one is probably the most important and that is to tune out the news media noise. The news in case you haven't noticed, whether it's your local news or the national news is constantly negative. And that's because fear draws us in, it plays on our emotions and it also is great for selling advertising. Fear sells. Listening to all the doom and gloom and stress through the media can play on your emotions and cause you to do the wrong thing at the wrong time. I did a little experiment myself and I, we used to watch the national news every night we would record it and when we got home from work and got settled, my spouse and I, Kay would sit down and watch the national news together and it just was so negative all the time and so fearful that I just can't stand it so I don't watch it anymore.
She's still likes to watch it, but I do not like to watch it. And then the local news is just so much worse than that even in terms of the negativity. But I highly recommend doing whatever you can to block out all of that noise, especially as it pertains to what's happening with the economy and what's happening happening with the stock market. Short term fluctuations do not matter one single bit. When you've got a financial plan and you're staying the course and you are invested appropriately for your goals and your risk level. So turn off the news and live your life and let your financial advisor do the worrying. Number two, don't try to predict the direction of the market. Or you may have heard this phrased as don't try to time the markets. There are a lot of pundits who recommend and tried to predict which way the market's going to go in the short run.
And sometimes the right and sometimes the wrong. And usually if somebody is right, that same person is never right twice. So it's really a fool's game to listen to any expert, try and predict the short term direction of the markets. The longterm direction of the markets is up. The problem with attempting to avoid the down days in the stock market is that you miss the rebounds that follow. And in many cases those are substantial rebounds that can impact your returns significantly. And you may also never get back. For example, after the 2008 great recession, many investors who bailed out during that time never got back in. And those investors missed one of the longest and most substantial bull markets that we've ever seen in history. So when do you get back in? If you decide to get out, it just becomes a very difficult thing to build.
Any kind of a strategy around staying invested through the best and worst times has proven to be the best strategy over the years in the history of the markets. So rather than trying to time the markets, stay invested in a globally diversified portfolio that has an appropriate mix of stocks and bonds and cash reserve for your short term needs and make sure it is allocated for your goals, your specific goals, and your risk comfort level so that you can sleep at night when we do have these difficult downturns in the market. Number three, review your current portfolio risk. If you have let your investment portfolio ride over the last decade without rebalancing it at all, or your advisor hasn't rebalanced it for you or whoever your wealth manager, whoever's managing your assets, then chances are your stock allocation is probably much greater now than you might realize. You may be taking a lot more risk now than you should be.
And so it's a really good time to review what your current risk level is in your portfolio so that if we do experience a significant downturn, then you're more protected on the downside. So you want to make sure you're not assuming more risk than you are comfortable with and exposing yourself to greater portfolio changes in the future. Review your portfolio and make sure it's not over-weighted in stocks beyond your comfort level. Number four, avoid index funds, and I say this with a bit of a caveat here. It's okay to have index funds as a part of a core investment portfolio, but if it is your only investment, then you could be subjecting yourself to more risk than necessary. Just keep in mind when you invest in the index, you are also assuming 100% of the downside of the market. There is no diversification that allows for you to reduce your downside risk and so the problem with index funds is that they're like a roller coaster with no breaks.
You are basically investing in the market directly. Now, that's been a great thing over the last 10 years because the market has mostly gone up, but when the market does correct, you are going to participate in 100% of that downside if you're invested solely in an index fund. Also most index funds are what we call market cap weighted, which means that by default you may own more of a sector, a specific sector, then you should, for example, as technology shares have become more inflated and overpriced over the years, you're going to own more technology simply by being in invested in the index fund because of how it's weighted. So I'm a big believer in having a built in risk management strategy for your portfolio. The less ups and downs and big swings and gyrations that you experience over time, the better your outcome will be and the better you'll sleep at night.
So for your serious wealth, consider a more risk adjusted investment strategy rather than simply an index fund. Tip number five for surviving market volatility and staying focused on your goals is another one of my favorites. And that is to consider adding to your investment portfolio. There is no greater tool for beating market ups and downs. Then savings, it's a blunt force way to grow your assets and your wealth over time. Add to your investment portfolio on a consistent basis. If you, if you can, and even automate your investing, have it come out of your paycheck into your company 401k plan or automatically pull funds from your bank account to your investment account. Automate that savings so that you don't even miss the money and that allows you to buy on the dips and the downs and buy fewer shares when the market is up. And that is something that we call dollar cost averaging.
It's just taking regular dollar amounts on a consistent basis and contributing it to your investment portfolio over time. And it usually can be automated if you have significant cash sitting on the sidelines and it's not your cash that you have set aside as your emergency reserve, which I recommend anywhere from one to three years of a cash reserve for your fixed expenses, depending on how close you are to and whether or not you are in retirement, but any additional cash you should be putting that to work for you within your portfolio where it can grow and you can take advantage of any market dips and downturns. It really does pay to be more of a contrarian and move away from this herd mentality that you might see of fear and sometimes panic about the markets, especially the kind of fear that comes out of the news media, but this kind of a dollar cost averaging or automated investment and saving strategy really removes the emotion from the investing and allows you to average into the markets over time rather than attempting to predict the perfect time to invest because there is no perfect time to invest.
It's always a good time to invest when you're thinking about the longterm and your future. Okay, number six, get a real financial plan in place. I really go into detail about this in episode six of the midlife money Gow podcast. You can go to midlife money, gal.com forward slash zero zero six if you want to revisit that one. A real financial plan actually helps you with creating a concrete vision for what you're striving for. It's a roadmap. It is something that you can follow through thick and thin and you'll have to adjust it and it will change a bit over time as your life evolves, but your plan really has very little to do with your investment portfolio. If your planning is done well and it is mapped to what your specific goals are and what your resources are and what you need to do to get to your goals, then your investment portfolio will do what it's supposed to do over time.
As long as you're allocated appropriately for your age, for your time horizon, for your risk, comfort level, all these different things. But the plan is really the key to investment success. Your portfolio is a critical piece of your financial life, no doubt about it, but without a financial plan, there really is no context for your investments. What are they supposed to be doing for you? What goals are they going to? Are your investment assets going to fund down the road when you hit retirement or if you're in retirement? You know, how should your portfolio be invested so that your money will last and you won't outlive it? The planning process can help you clarify your financial goals and map out exactly how to achieve those goals and it's an ongoing process. It's a dynamic process. It's not. It should not be a onetime event. All right, let's review these six steps for surviving market volatility and staying focused on your goals.
Number one was tune out the news media noise. The news is bad news. Number two, don't try to predict the markets. Number three, review your current portfolio risk. Number four, avoid solely investing in index funds. Number five, add to your investment portfolio on a regular and consistent basis. Number six, get a real financial plan in place. If you can do these things, then you will find you'll be much more resilient during challenging times. When the economy is uncertain, the political environment is uncertain and the stock market is fluctuating up and down and up and down. Following these steps and having a real financial plan in place will help to remove the emotion out of the equation and you won't be making impulsive emotional decisions about your money. These six tips are really designed to help you make better financial decisions. During difficult times and put yourself in a more improved financial position. I hope
These tips help you to become more resistant to the market's storms and help you weather these storms throughout your financial journey. You've been listening to the midlife money gal podcast. You can follow me on Instagram at Stephanie Sammons and Facebook at Stephanie Sammons, CFP, or visit midlife money, gow.com if you haven't yet, go to Apple podcast and subscribe rate and review this podcast. Join me next week for another episode on navigating midlife and money. Thanks for listening. The information on this podcast is for educational purposes only and should not be considered specific investment tax. Full legal advice. Please consult with your own professionals who have a complete understanding of your situation.
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