Last week, I discussed four ways to keep your cool in a volatile market. Since then, the market has only gotten more volatile. As of Monday’s close, it was down 5% from its highs.
This weekend, someone I know was very worried about the recent market volatility. She has exposure to stocks, but she also has a large amount of her capital in Treasurys.
I told her, “If a 5% drop has you so stressed out that you can’t sleep, you shouldn’t be in the market.” She countered that she needs the growth that the market offers.
So she wants all the growth that the market can provide… with none of the risk.
That’s the problem that many people face. There’s pretty much no other place to put your money that offers the 8% to 10% average annual growth of the stock market. But that 8% to 10% average annual growth is over the long term. It is not a steady and straight line. We’ll have years like we had in 2023 and 2024 – when the market was up more than 20% each year – and years like 2022, when it was down nearly 20%. Some years will be much worse.
I suggested to my friend that she’s fine, considering the large amount of Treasurys that she has. Based on her fixed income alone, she’ll be able to meet all of her financial obligations for years to come.
In last week’s column, my first point was to think about your timeline. I believe this is one of the most important yet overlooked things an investor should do.
If you have several years until you’ll need the money you’ve invested in the stock market, you shouldn’t pay attention to the market’s day-to-day moves. Even a nasty bear market will have almost no effect on a portfolio that won’t be cashed out for another decade or longer (unless you invest more during the bear market, in which case it will have a very positive effect).
On the other hand, an investor who plans to tap some of the funds within a few years shouldn’t have that money exposed to potential volatility. I always recommend taking any cash out of the market that you’ll need within three years.
Anything can happen in a three-year period. If your timeline is longer, you should be OK, as bear markets typically last less than a year.
Here’s a practical example of how I handled a situation with a definitive timeline.
We invested in 529 accounts for our kids’ college education.
Starting around their junior years of high school, I started getting more conservative in their portfolios, moving about 25% out of stocks and putting it into fixed income and cash. Each year, I moved another 25% or so to mostly cash. I knew that if the market continued higher like it did in 2023 and 2024, those funds would not grow. But I also knew that if the market crashed, we’d still have enough cash to pay tuition.
I was able to use the market’s strength to my advantage. Because the market was so strong the past two years, I was selling high and could sell fewer shares than I would’ve had to previously. We had the cash for school, but there was also some left over that we could allow to grow along with the market.
However, I take a much more hands-off approach with my retirement accounts. I am hopefully years away from hanging up my laptop, so when the market tanks like it did in 2022 (or like it’s doing now on a smaller scale), I don’t even think about it in regard to my personal finances.
The market goes up over the long term, and even if there’s an extended period of time that it doesn’t perform well, its trend over more than a century is unlikely to change.
So think about your timelines. Put money in buckets if you need to – short, intermediate, and long term – and adjust those buckets based on your needs, not what the market is doing.
You’ll feel more in control, and that will help you sleep at night. Plus, you’ll have the cash you need while still maintaining some exposure to the long-term growth that the market provides.