First of all, preparing for volatility needs to begin well before the volatility arrives. It starts with your plan and making sure you have an investment strategy to help you reach your goals with the least amount of risk possible.
For those nearing or in retirement and living off income from your investments, the key is maintaining enough equity exposure within your investments to grow your income over time and allow it to keep up with inflation. Fixed income investments such as money market funds, CDs, and short-term bonds simply are not producing the interest rates high enough to achieve this goal.
With that said, for almost all of you, there is going to be at least some equity exposure within your investment accounts, and so at least a portion of the account is going to move and flow with the equity markets. Your ability to handle these movements and stay the course is exactly how you will be rewarded with the returns you need to reach your goals.
For those of you who are still in the accumulation phase and investing money on an ongoing basis (or those of you who have had a liquidity event and are investing excess cash), volatility should be seen as a great buying opportunity. This is easier said than done, but from an investment perspective, it’s what smart investors do.
Whatever you do, don’t abandon your financial plan or make the “big mistake.” Instead, maintain a long-term perspective. For the great majority of you, even if retired, your investing time horizon is still measured in decades. Therefore, the “risk” in your portfolio (as defined by the probability that it will go down and stay down) can diminish significantly if you stay properly diversified.
While periods of volatility in the market can be stressful, be encouraged by this: equity investments (even with the extreme volatility of the past) have rewarded patient investors with better returns compared to fixed income investments over long periods of time. So stick with your financial plan, which should include a properly constructed portfolio utilizing equity investments for long-term goals and fixed income investments for short-term goals.
Warren Buffett is quoted as saying, “The stock market is a device for transferring money from the impatient to the patient.” This is the same guy who told his trustees that when he dies they should put 10% of his money in cash the rest in the S&P 500 stock index. Instead of being afraid of volatility, he understands he’s simply investing in the most well-financed, profitable companies in the world.
