Created: May 29, 2022
Modified: September 9, 2022

Episode 69: What Should I Not Do in a Volatile Market?

Today’s question is, what should I not be doing in a volatile market?

Heath Grossman here for Money Wisdom Question Series. I’m going to break down my answer by separating people into two camps.

How Different People React to Market Downturns

The first camp of people includes those who have done a broader financial plan, which includes a retirement income plan. They’re confident that they’re going to have enough income coming in and they’ve allocated some of their assets to safe types of investments. Things that are considered “safe” help guarantee that you cannot lose any money in a market downturn like this. I’m going to assume those people also have some exposure to the market in addition to those safe assets.

Don’t Panic During a Volatile Market

What they should not be doing in volatile markets like we’re experiencing lately is panicking, making any big wholesale changes, or letting emotions dictate what they do. I know that what I’m saying is often not easy advice to follow when markets are volatile, especially towards the downside. It’s very emotional. This is money that we’ve saved up, and our natural inclination as humans is to stop that downturn to some degree.

What we’ve learned from history is that when these things happen, markets do eventually come back. I’m not saying it’s going to come back next week or next month, or maybe even this year, but we know that over periods of time, the market grows and comes back. If you’re trying to time the market and go to cash because you’re trying to stem the tide, ultimately, the next question becomes when do you get back in? It’s very difficult to time the market. You ultimately have to be right twice. It’s hard enough being right once.

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Are You Taking Too Much Risk in Retirement?

The other camp of people includes those who maybe have not created a broader retirement plan, including a retirement income plan. Maybe those folks have allocated too much of their money towards the market. Maybe they’ve been lulled into a little bit of complacency over the past 12 or 13 years with the market being up. We always love when the market goes up, it feels good and it feels like we’re doing the right thing because our money is growing. But, how do we know when we’ve taken on too much risk?

We know exactly the answer to that question. We know when we’ve taken on too much risk when the accounts go down to the extent that we’re not comfortable with it. So for folks like that, they should probably be revisiting their risk tolerance and allocation to make sure it’s still in line with who they are as people and what their long-term goals are.

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