Market volatility can be unsettling, especially when headlines scream about stock market drops and economic uncertainty. Recently, concerns about a slowing U.S. economy led to a sharp market selloff, with the Dow dropping as much as 1,100 points before recovering some losses. These fluctuations are a normal part of investing, but how should investors respond when they see a sea of red in their portfolios?
In a recent conversation, Erin and Larry discussed how investors can approach volatility, avoid emotional decisions, and ensure their financial plans remain on track. Here’s what you need to know.
What’s Causing Market Volatility Right Now?
A handful of major tech companies have dominated the stock market. Just ten stocks, including NVIDIA, Amazon, and Microsoft, have contributed 82% of the S&P 500’s growth. While these companies have driven market gains, they’ve also made them more vulnerable to sharp declines.
Recently, these tech giants saw significant pullbacks—Microsoft down 10%, NVIDIA down 15%, and Amazon down 13%. This led to a broader market selloff, sparking fear among investors. However, as Larry pointed out, the selloff wasn’t across the board. Many smaller, undervalued stocks held up well, highlighting the importance of diversification.
Should You React to Market Drops?
A quick Google search for “Should I…” during a market dip often brings up suggestions like “sell my stocks right now.” This reflects the anxiety many investors feel during downturns. However, selling in a panic is one of the biggest mistakes investors can make.
Larry emphasized the importance of having a solid financial plan rather than reacting emotionally. If you panic-sell on a down day, you lock in losses and miss out on potential rebounds. For example, selling on a Friday drop might mean missing a Monday rally, which could recover much of the lost ground.
Lesson: You don’t make money timing the market; you make money staying invested over the long term.
How a Well-Diversified Portfolio Handles Volatility
Diversification is the key to weathering market downturns. Many investors have traditionally followed a 60/40 portfolio strategy (60% stocks, 40% bonds). While some questioned whether this approach was still practical, Larry noted that it’s performing well today, particularly for those who have diversified beyond big tech stocks.
A strong portfolio includes:
- Large-cap and small-cap stocks
- Bonds for stability
- Alternative investments for additional security
- Risk-managed products like annuities for income stability
By spreading investments across different asset classes, investors reduce their exposure to any market event or downturn.
How to Stay Calm During Market Volatility
If market swings make you nervous, follow these strategies:
- Stick to Your Plan: A well-designed financial strategy accounts for market ups and downs. Trust the process.
- Turn Off the Noise: Headlines can be dramatic. The media thrives on fear-based reporting, but a long-term investor’s success isn’t determined by daily stock movements.
- Stay Diversified: Over-reliance on a handful of stocks (even the big names) can be risky. A diversified approach is key.
- Work with a Financial Advisor: Having a trusted professional to guide you through volatility can provide peace of mind and prevent costly mistakes.
Remember: Volatility is temporary, but a strong financial plan is built for the long haul.
Final Thoughts: Plan Your Work, Work Your Plan
Larry’s advice is simple but powerful: Plan your work and work your plan. Investors who follow a well-structured financial strategy don’t need to panic when the market dips—they’ve already prepared for it.
If you’re unsure whether your financial plan is built to withstand market volatility, now is a great time to review it with a professional. At SFA Wealth, we specialize in creating personalized retirement strategies that help you stay confident in any market environment.
Need help creating a solid financial plan? Call 615-216-1048 or visit sfawealth.com to schedule a consultation.