When You Should Care About Market Volatility

If you’re looking to retire someday (and who isn’t?), then you likely have a good chunk of money invested in various securities. And when you’re counting on those investments to grow so you can pay for the retirement of your dreams, it can be scary watching the markets go up and down. 

Market volatility is never fun, but it’s also not something you need to be concerned with on a daily basis. It’s natural to worry when your investments are down and cheer when they’re up, but constantly checking investment performance isn’t doing you any favors–especially if you already have a long-term financial plan that’s built to withstand the ups and downs of the market. 

There are, however, a few instances when you should be keeping an eye on market performance. Here are three times when you should care about market volatility.

What Is Market Volatility? 

Market volatility refers to the rate at which the price of investments rises or falls over a given period. It is typically measured by how dramatically — and how frequently — asset prices swing away from their average. While some degree of volatility is a normal part of investing, sharp or prolonged swings can significantly impact your portfolio’s value and your ability to meet long-term financial goals. 

If You’re About to Retire

This is the home stretch. All those years of saving are finally about to pay off, so you likely can’t afford to deal with any serious declines now. Volatility in the markets is a much more relevant issue here than if you’re still years away from retiring. If your portfolio does take a hit during the period before you retire, your future returns may be severely affected. You may even have to alter expectations for your lifestyle in retirement if you don’t take steps to correct course. 

Younger investors have the time to absorb downturns in the markets that those in retirement might not have. If you’re 30 or even 40, you have longevity on your side. While history doesn’t guarantee anything in the future, the markets usually come back from significant declines. You’ll likely have time to recoup the “losses” you experience in a downturn–as long as you don’t fall victim to panic and sell at the wrong time. 

Additionally, you still need an income after you retire. Your bills and expenses won’t suddenly go away once you hit retirement, and you’ll need positive returns from your retirement accounts to pay for these expenses. If you suddenly find yourself in a market downturn, you may need to move some assets around between various taxed, tax-deferred, and tax-advantaged accounts so you can still pay for your expenses in the short term. 

Questions worth reviewing with your advisor if you’re close to retirement:

• Is my current asset allocation appropriate for someone within five years of retirement, given today’s market conditions? 
• Do I have a sequence-of-returns strategy in place to protect my portfolio if markets drop right before I retire? 
• Should I shift a portion of my near-term income needs into more stable, lower-volatility assets now?

If You Have a Higher Allocation of Stocks Than Bonds

A portfolio that has a higher allocation of stocks tends to be more susceptible to market volatility than a portfolio that is mostly comprised of fixed-income investments. Historically, the U.S. stock market has been known to fluctuate pretty significantly from year to year. Since 1926, using end-of-year data, yearly real returns have ranged from -38% to +58% and rarely stayed flat. Meanwhile, the fixed income market has historically been much steadier. Since 1976, yearly real returns on the Barclays Bloomberg U.S. Aggregate Bond Index have ranged from -10% to +27%, with most returns staying within the range of -7% to +7%. 

Historical data can’t be counted on as a direct indicator of future performance, but the data shows stocks have historically had a much stronger response to changes in the market than bonds. While stocks have the ability to yield higher returns, you have to hold your breath through greater periods of volatility. Basically, the greater the risk, the greater the reward. Bonds, on the other hand, come with historically less risk and less reward. 

An experienced financial advisor can help you identify your risk tolerance and build a portfolio around it. But you also need to then rebalance your portfolio from time to time. If you rebalance regularly, then market volatility is likely less of a concern to you, since you’re keeping your portfolio aligned with your ideal levels of risk. If you rarely (or never) rebalance, your portfolio may have a greater allocation of stocks than you realize. 

Questions worth reviewing with your advisor if your portfolio is stock-heavy:

• When did I last rebalance my portfolio, and does my current stock-to-bond ratio still reflect my actual risk tolerance? 
• Am I taking on more equity risk than I’m comfortable with — especially if markets correct sharply? 
• Would adding more fixed-income investments help smooth my portfolio’s volatility without sacrificing too much long-term growth potential?

If You Need Money in the Near Term

At Wealth Enhancement, we have a proprietary tool called the Your Money Matrix™ to help you plan your long-term financial strategy. Using the Your Money Matrix, you allocate assets into retirement accounts based on when you plan to use them: the next five years (short-term), 6-10 years (mid-term), or 10 or more years (long-term). Money that you could need in the next five years is much more susceptible to volatility than money you won’t need for 6-10 years, or even longer. That’s why it’s important to split your money into short-term, mid-term and long-term buckets. Invest shorter-term money in more conservative, fixed-income investments, and invest longer-term money in higher risk, higher reward investments like stocks. 

With people living longer than ever before, it’s not unreasonable to think you’ll need your retirement savings to last for 20 or 30 years. When you categorize your investment holdings into short-, mid- and long-term buckets, you can stress less about the ups and downs of the market, because the money you’ll need in the near future is held in instruments less vulnerable to volatility. Meanwhile, the long-term money that goes up and down with the markets likely has a long enough timeline to recover from its low points. 

It’s understandable why people invested in stocks might closely follow the markets, but that doesn’t necessarily mean you need to worry when there is a correction. If you have a long-term plan based on your values, you should be ready to ride out any volatility the market throws at you. 

Questions worth reviewing with your advisor if you need money soon:

• Is the money I plan to use within the next five years sitting in appropriately conservative investments, or is it still exposed to significant market risk? 
• Have I mapped out my short-, mid-, and long-term income needs so that a market downturn won’t force me to sell at a loss? 
• Does my withdrawal strategy account for how long my retirement savings may need to last — potentially 20 to 30 years or more?

And if you don’t have a long-term plan, reach out to a financial advisor today to learn how to safeguard your retirement from extreme market volatility.

Frequently Asked Questions About Market Volatility

1. What is market volatility, and why does it matter for retirement? 

Market volatility refers to rapid or unpredictable changes in the price of investments. It matters for retirement because significant downturns at the wrong time — especially close to or during retirement — can reduce the value of your portfolio at precisely the moment you need it most. 

2. How much market volatility is normal? 

Some degree of volatility is a normal and expected part of investing. The U.S. stock market, for example, has historically seen yearly real returns swing from as low as -38% to as high as +58% since 1926. Short-term swings are common; it’s the long-term trajectory that matters most for retirement investors. 

3. Should I move my money out of stocks when markets are volatile? 

Generally, no — especially if you have a long time horizon. Selling during a downturn locks in losses and can mean missing the recovery. Instead, focus on whether your portfolio is aligned with your risk tolerance and time horizon, and speak with a financial advisor before making any major changes. 

4. How does market volatility affect bonds versus stocks? 

Bonds have historically been far less volatile than stocks. Since 1976, real annual returns on the Bloomberg U.S. Aggregate Bond Index have ranged from -10% to +27%, compared to a range of -38% to +58% for U.S. equities since 1926. Bonds generally provide more stability, though they also tend to offer lower long-term returns than stocks. 

5. What is sequence-of-returns risk, and how is it related to market volatility? 

Sequence-of-returns risk is the danger that a market downturn occurs early in your retirement, forcing you to sell investments at a loss while simultaneously drawing income. This can permanently reduce your portfolio’s ability to recover, even if markets eventually rebound. It’s one of the key reasons market volatility matters most in the years just before and after retirement. 

6. How often should I rebalance my portfolio to manage volatility? 

Most financial advisors recommend reviewing and rebalancing your portfolio at least once a year, or whenever your asset allocation drifts significantly from your target. Regular rebalancing helps keep your exposure to stocks and bonds aligned with your risk tolerance, reducing the impact of market swings on your overall plan. 

7. What should I do if I’m worried about market volatility right now? 

Start by reviewing your current asset allocation and time horizon. If you’re close to retirement or need funds in the near term, make sure that money is in appropriately conservative investments. If you don’t have a long-term financial plan in place, connect with a financial advisor who can help you build one designed to weather market ups and downs.  

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. 

All investing involves risk including loss of principal. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. 

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