4 Ways to Manage Market Volatility

By: Stacey Nickens

Every couple of days, I get an email from a client wondering if they should be worried about market volatility, rising inflation, or some other catastrophic financial event. Often times, investors in the midst of panic wonder if they should move their money entirely into cash or incredibly “low-risk” investments. While each client situation is unique, I often encourage people to consider a few things before making any investment decisions related to market volatility. These considerations could help investors make calm and rational decisions about their money, such that their future is being directed by facts rather than fear.

Monitor company fundamentals and consumer behavior. While the stock market fluctuates due to news headlines and other temporary events, these environmental fluctuations are often short-lived. In the long term, markets perform in accordance with the financial health of their underlying companies. Accordingly, I encourage investors to track the revenue growth for some of the biggest companies in the U.S. stock market. These companies include Apple, Facebook, Amazon, Microsoft, Alphabet, Nvidia, JP Morgan, Berkshire Hathaway, Tesla, Johnson & Johnson, Visa, UnitedHealth, PayPal, and Home Depot. If these companies continue to post strong returns, the stock market will likely show long-term health as well.

Expect pullbacks. While I always remind people that no one can predict the future, there is some benefit to following the old saying: “Expect the unexpected.” Consider childbirth. If nurses told expectant mothers than childbirth would be easy and calm, expectant mothers would be horrified by the pain and difficulty of actual childbirth. Instead, expectant parents are coached about some of the things can expect during childbirth, and while being coached won’t prepare parents for every difficulty that will arise, normalizing the difficulty of childbirth does help parents better manage the chaos of birthing. The same can be said of the stock market. Market pullbacks are common. Intra-year pullbacks of 10% or more have happened in 12 of the past 20 years. Knowing this, prepare your portfolio and your emotions for this volatility. When a pullback eventually occurs, you can know that your birthing bag is ready to go at the door. Living through the pullback won’t be easy, but at least you’ll be more prepared.

Weed out short-term noise. If the stock market is fluctuating, consider whether it is doing so because of real company problems or because of short-term noise. For example, we’ve recently seen some stock market volatility due to earnings disappointments. This disappointment will pass, and as a result, its impact on the market is temporary. Instead of responding to temporary impacts, you can ride out the volatility knowing that this too shall pass.

Remind yourself that history and fear cannot help you predict the future. This final reminder is perhaps the most important. Consider a headline from July 24, 2001: “Amazon Trims Losses; Sales Outlook Dims.” In July 2001, Amazon had lost money for 17 consecutive quarters. Investors were fearing the worst. They may have been holding the fears many investors hold: What if this company tanks, and I lose an important chunk of my savings? How will I fund my retirement and financial goals? These investors may have felt that their fears could predict the future. If they were worried about Amazon tanking, Amazon was definitely going to tank. Moreover, these investors even had history on their side. If Amazon had 17 losing quarters, maybe they were going to have 17 more bad quarters. However, these fears didn’t come true, and history didn’t repeat itself. Amazon stock has gained over 29,000% since July 2001, and two decades later, Amazon’s founder flew to space. So with this story in mind, remember that none of us are fortunetellers, no matter what fear or history is whispering in our ear.