Trying to make sense of market volatility? 5 big questions answered

There is no doubt we are amid an unprecedented event both culturally and economically. We are thinking about the health and wellbeing of our loved ones. We’re thinking about the global economic impact that has already hit, and what’s yet to come. In many ways, we’re navigating a new way of life.

We’re also thinking about our financial security. Millennials that came of age during the Financial Crisis in 2008 face the current environment with much more at stake. They are more mature in their careers. Many have contributed to 401Ks, and others have additional long-term investments tied to the stock market. And yes, 45 percent of them are paying back student loans.

To help demystify what’s happening and what it means for our community of investors, we asked experts to offer their take on some of the biggest questions that have arisen in light of recent market volatility.

How can I put this in context?

This is the most significant pandemic of the modern era, and its implications on the economy cannot be overstated. The experts we spoke to say that the fact this is an exogenous event contributes to the widespread feelings of uncertainty—but perspective is key for long-term investors.

Thomas Shohfi, assistant professor at the Lally School of Management and Technology at Rensselaer Polytechnic Institute, said that COVID-19 is “without precedent” in terms of the pace of economic slowdown: “We have never seen a bear market move this fast and are nearing all-time highs in volatility.”

And yet, history provides several examples of significant market events that have recovered from declines. Experts cited Black Monday (1987), the tech bubble collapse of the early 2000s, and the 2007-2008 global financial crisis as the three key events of the second half of the 20th century on par with the current volatility.

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Source: Macrotrends (data as of March 23, 2020)

“After this incredibly tumultuous time period, the Dow is back to levels that it was in 2016, which was just 40 months ago,” said Robert Johnson, a finance professor at Creighton University’s Heider College of Business. “The banks are in good shape and the economy is in great shape. If we can flatten the curve, as they say, this is not going to wreck the economy and it’s not going to wreck this market.”

Johnson added that the biggest ally that anyone has in investing is time—a viewpoint he shares with Warren Buffett, whom he has known since he was 12 years old. Young investors innately have time to learn over their lifetime, but they also need discipline, he said.

Maya Tussing, co-founder of Fairlight Advisors in San Francisco, noted that perspective is important when investing for the long-term. “You’re going to live through a lot of these events,” she said. “Maybe it’s the first, but it won’t be the last.”

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My 401K is sliding. Now what?

When it comes to retirement savings, financial advisors stress the importance of things like 401Ks and Roth IRAs given that the future solvency of Social Security is not guaranteed. In fact, research estimates that millennials can expect to receive about 75 percent of what they paid in—which puts greater pressure on the performance of individual retirement plans.

Retirement plans that are tied to the market are likely following the trend of the S&P 500, which has seen a drop of about 30 percent since early March.

For people who are decades away from retirement, experts say the best thing to do is nothing at all.

“If you go back to 2008-2009, the people that did the best were the ones that just put on their blinders,” said Morgan Newman, a Brooklyn-based financial advisor who primarily works with millennials. “The people who got hurt during that time period were the ones that moved into cash, because not only did they lock in those losses, they missed the entire ability to grow that money back.”

Newman added that 401Ks consist of mutual funds, and within those mutual funds are solid, reputable companies—in other words, “stocks you probably liked a couple of months ago when they were at all-time highs.”

Shohfi echoed the “do nothing” rule of thumb and advised investors from making any moves that substantially deviate from their long-term goals. “Emotionally, don’t let it dominate your day-to-day mindset and focus on other, more important things in your life,” he said.

What about non-retirement investments?

During periods of market volatility, there are also questions about non-retirement investments.

The experts we spoke with agreed that resetting goals after a volatile few weeks of returns may be premature given the uncertainties that still linger around COVID-19. They also reiterated the common adage that “time in the market beats timing the market.” Flooding cash into canned soup stocks might make logical sense today, but if you’re investing over the long-term you might be better off continuing to invest in the companies you believe in regardless of external events.

Experts suggested that investors who employ a dollar-cost averaging approach might consider taking advantage of the discounted prices on stocks they want to own for a long time. Dollar-cost averaging simply means committing to investing a set dollar amount on a consistent basis, no matter what the stock price is. This method allows people to invest consistently in the companies they believe in and suppresses our natural inclination to time the market.

“If you have the financial flexibility, consider slightly modifying your plan to add a little more to your scheduled investment account contributions to take advantage of better pricing,” Shohfi said. “However, note that we are in an unprecedented economic disruption that has increased market volatility substantially: don’t try to time a market bottom which is extremely difficult.”

Newman echoed the important consideration that nobody knows when the bottom is going to be. However, she added that it’s an appealing time to put cash on the sidelines to work, if you have it. For new investors, she generally recommends index funds or exchange-traded funds (ETFs), which mirror indices or sectors and allow you to invest in a basket of stocks at once.

How can I stay informed while staying level-headed?

The recent market volatility has pushed financial news to the mainstream. We asked experts how young investors should think about their consumption of financial media and offer some tips for building healthy habits to stay informed.

The worst thing you can do? Follow every move, says Johnson. “There’s an old Wall Street adage I always tell people. You can either eat well, or you can sleep well. If you invest in stocks, and you’re in it for the long-term, you’re going to eat well. But there’s going to be some sleepless nights,” he said.

Shohfi added that the instant access we have to news via our smartphones can tempt us to follow every market movement, which makes it tougher to resist getting caught up in the volatility.

“In addition to anxiety from the pandemic itself, be aware of how the market is influencing your mental and emotional state,” he said. “If you become uncomfortable, step away and do something else productive, relaxing, or distracting.”

Mayda Poc, a career and life coach who formerly worked in financial services advised people to avoid making decisions based on impulses, especially in an emotionally-charged environment. She added: “Once you feel more grounded, go back to more logical and detached views. What are your immediate financial needs right now? What is the best way to move forward for you?”

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How can I be proactive with my finances amid volatility?

Finally, we wanted to hear from experts about what people can proactively do now to take control of their financial future amid times of uncertainty. Here’s what they told us.

Keep things in perspective

Each of the experts we spoke with cited the long-term returns of the stock market (10 percent, compounded annually, on average), as well as past events that have shocked the market in similar ways as COVID-19. While past performance is not a guarantee of future results, historically the market has rebounded from these types of circumstances.

Audit your financial health

Moments during which the economy, as well as our own personal finances, are top-of-mind present opportunities for self-reflection and goal-setting. Maggie Johndrow, a certified financial advisor, says now might be a perfect time to “take stock of your financial picture.”

Her tips? Start by making a list of your assets and their values—things like checking and/or savings accounts, 401Ks, investment accounts, real estate properties, and the like. Make another list of your debts, which might include credit cards, mortgages, or student loans. Next, use this data to make a budget. Understand how much it costs for you to live each month.

From here, you can use this data to guide your short- and long-term financial goals.

“Answer the question: how much of your short-term goals are actually related to the stock market? And do you need any of the money that you’ve invested for in the next 6-months? Chances are the answers are ‘no.’ The majority of people who invest into the stock market do it for the long-term, especially for retirement,” Johndrow said.

Your audit might also include exploring whether you’re in a position to automate recurring savings. Johnson noted that when we have to consciously think about saving or investing, there is an added layer of psychological friction that simply doesn’t exist when the deposits happen passively. This is why the dollar-cost averaging approach is so popular among long-term investors.

“We aren’t profit-maximizing automatons,” he said. “We’re human beings with emotions. And the more decisions that you can automate, the better.”

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Empower yourself with education

Tussing acknowledges that the financial services industry has been purposely opaque at times. Not everyone is an expert in every facet of the market, and that’s OK, she said. Focus on the basics, and don’t be afraid to ask questions.

If 401K anxiety has you peeking into your portfolio 24/7, consider pivoting that act of checking into an educational moment. Look into your allocations and take stock of which companies make up the funds you invest in. Understand what the terms mean and how they work.

“When our environment is all over the place, one of the best ways to deal and to regain a sense of control is by taking a form of action,” Poc said.

A silver lining to social distancing? “Everyone hitting the pause button on their social and professional lives in some capacity gives people more time to make space for these kinds of topics that usually get pushed to the back burner,” Newman said.

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This article was last updated on March 23, 2020.

The above content is provided is paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

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