Dictionary definitions of volatility span a surprisingly wide range, including arbitrariness, fickleness, inconstancy, and flexibility. Flexibility seems to be the best fit when discussing how investors may want to respond to the gyrations in the financial markets. Volatility can have multiple causes, but inflation currently is the main driver of investor anxiety, with the Consumer Price Index in the 7% range. Some prognosticators see price hikes leveling off and even declining, while others disagree. Indeed, the cacophony of predictions can keep investors even more uneasy. The unpredictable tension in Ukraine also is a non-financial factor rippling through the markets, and the Federal Reserve has said it plans to raise short-term interest rates (no one knows how many times) this year to hopefully dampen inflation even if it slows the economic recovery we are witnessing.
What is the average investor to do? One suggestion by Alan Lerner, who has taught economics at the NYU School of Business and helped to guide investing at two major banks over his career, is to “get into a stable situation and don’t go crazy over day-to-day movements in the markets. You want to be able to sleep soundly at night.”
It’s important to speak with your financial advisor in these times to assess your risk. Fidelity notes that market downturns may be a reminder that it’s important to regularly review your portfolio and make sure your mix of investments is still appropriate. If it’s been a long time since you created your mix of investments or if your situation or feelings about risk have changed, you may want to review or update your plan. The goal is to have a plan that makes sense regardless of short-term market conditions. For most people, stock market drops create uncertainty, sometimes even anxiety. It’s natural to wonder if you should try to pull out of the market to avoid losses, or if the investments you hold are just too risky for you.
No one can pick tops or bottoms in markets, and one’s age is also a factor. Older people generally should be defensive in dealing with volatility and cut back on more speculative investments. That does not necessarily mean putting all your money in the bank. For example, one could reduce high-flying growth stocks and turn to less glamorous value stocks where there is generally a steady return, Mr. Lerner notes. Having some cash equivalents like bank certificates of deposit is another possibility. However, this view does not apply to younger investors who have time on their side. They should not abandon the markets. And remember, bad times in the markets come to an end. The 2008 market crash evolved into a strong recovery although it did take some time.