As we have seen recently, the stock market can experience significant fluctuations, rising one day and decreasing the next day. With market fluctuations, tariff announcements and policy changes flying around, you may wonder what to do and whether now is the time to take action.
I hear from many financial advisors, including Betterment, that volatility is natural and often simply something you need to ride. That’s true.
The temptation to move your money into a safer position is understandable, but it is important to consider the long-term impact of your decision. It could miss opportunities for growth or cause bigger tax bills. Instead of taking immediate action, ponder your investment strategy, financial needs and potential next steps.
Start with this question: When do you need money?
It is impossible to calculate the market perfectly. But having a clear timeline of financial goals will help you prepare and even take advantage of those moments of uncertainty.
A longer horizon means you can afford to survive the downturn, but shorter people may need different considerations. We will proceed through four different scenarios based on Time Horizon and how we align our volatility strategy with financial goals.
Continue investing at every stage of life
If you’re not in the market yet: Waiting for the “perfect” time to invest often leads to missed opportunities. The best time to start is to have a diverse portfolio that aligns with your goals.
If you don’t need money for decades: Whether you’re talking about retirement, education savings, or just a healthy investment portfolio, time is your biggest asset, even after decades. Market volatility is normal, even if it feels confusing. By continuing to invest and making consistent contributions over time, you will benefit from long-term growth and compounding interest.
If you need money in the next 5-10 years: Your investments still have time to recover from the recession, but start thinking first. Make sure your portfolio reflects risk resistance while focusing on growth. As you approach your final goal, we recommend planning to shift to more conservative stock allocations to bonds or moving your money into a high-yield cash account.
If you retire or almost retire: In this retirement-specific case, you will already be cutting your investment (or will start soon). Remember that you don’t want to miss out on growth completely, as you will retire for a while, despite you “using” this money.
“Plan for a mix of safe, growth-oriented investments. A ‘bucket’ of cash or bonds can cover short-term needs, while stocks can support long-term growth.”®.
How good is you at alleviating volatility
Market volatility cannot be completely avoided, but proactive steps can be taken to manage your money and financial needs during the market slump. Establishing a thoughtful investment strategy will pay dividends in the future. Here are three things to consider when deciding on your approach:
- Invest in a properly diversified portfolio: By investing in a diverse portfolio, your money is not riding the wave of individual stocks, asset types, or country performance. For example, the Betterment Core portfolio is diversified worldwide, offering annual revenue of 9.0% since its inception (after fees).1
- Consider enabling tax loss harvest: One of the lining strategies for silver during the market slump is the tax cut harvest. This is a tax reduction tool that automates improvements. TLH is the process of selling assets with losses (which can occur especially during market slump) primarily to offset taxes owed on capital gains or income.
- Build and maintain an emergency fund. You need to work to maintain a 3-6 month expense. These funds should be kept in relatively liquid accounts, but can provide some degree of growth that will help keep up with inflation. We offer several options depending on your risk, growth and liquidity preferences.
- Emergency Fund, our investment allocation specially built for this use case, emergency with 30% stake and 70% bonds
- BlackRock is a 100% bond portfolio, a target income
- Cash Reserve, our 100% High Yield Cash Account
The whole picture
If you don’t remember anything else, remember this. The most important thing you can do is avoid rash decisions based on short-term market movements. Improvements are here with you at every stage and help to ensure you make the most of your money, whether the market goes up or down.
1As of 12/31/2024 and the start date 9/7/2011. Combined annual time-weighted return: 12.7% in 1 year, 7.9% in 5 years, and 7.8% in 10 years. Compound performance calculated based on the dollar-weighted average of actual client-time weighted returns for the 90/10 allocation core portfolio includes net fees, reinvestment of dividends, and excludes the impact of cash flows. Past performance is not guaranteed, but investments include risk.
