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Worried about recent volatile markets? Financial experts say stick to a plan

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The U.S. stock market has had a volatile year, and choppy swings up and down show no sign of subsiding anytime soon.

The roller-coaster ride can be worrying for those saving for, in or near retirement, yet financial advisors say that people with investment portfolios should stick with their previous plans.

U.S. stocks have whiplashed in 2020 as investors react to the ongoing health crisis and ensuing recession. The S&P 500 hit an all-time high in February, extending the longest bull market on record, before plunging more than 20% into a bear market in March as the coronavirus pandemic hit the U.S.

The S&P 500 has since rallied 60% from the March low to notch another all-time high in early September before slumping and then regaining some lost ground at the end of the month. Stocks started October on an upswing but have struggled to maintain gains since — the Dow Jones Industrial Average and S&P 500 on Wednesday had their worst day since June. The tech-heavy Nasdaq notched its worst day since Sept. 8.

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But one day later, on Thursday, U.S. stocks were up again in early trading, lead higher by tech shares ahead of earnings and a better-than-expected U.S. gross domestic product reading for the third quarter.

For retirees living on a fixed income, or people planning to retire soon, such moves can be harrowing.

"The volatility that's been experienced this year has been significantly more than in other years and is fueled by a lot of fear and concern around the pandemic," said certified financial planner Brad Lineberger, president of Carlsbad, California-based Seaside Wealth Management, which manages about $165 million in assets.

For those who plan to enter retirement during a choppy period in the stock market, there are a few key things to do to ease the transition from earning a paycheck to living off savings and investments.

Volatility can be your friend 

First is to accept market volatility, which is relatively common, as a normal part of the process of investing and the best way to outrun inflation, according to Lineberger.

"Embrace the volatility because it's why investors are getting paid to own stocks," he said.

This means investors should stay calm even through extreme movements such as those seen in 2020. Even though stocks have gyrated in recent months, long-term market returns are still based on the same factors: dividend yields, earnings growth and change in valuation, according to Zach Abrams, a CFP and manager of wealth management at Shaker Heights, Ohio-based Capital Advisors Ltd., which manages around $800 million in assets.

In addition, sharp moves down can also be opportunities to buy more stocks and set yourself up for future gains, according to Abrams. "When you're down 35% like we were in March, you get better entry points," he said.

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Have an emergency fund 

Even if you know volatility is your friend in the long run, financial advisors recommend having a cash emergency fund on hand, in case you retire during a market meltdown.

If the stock market falls, it's better to spend that money than sell assets at a loss which can't be recouped, according to Tony Zabiegala, chief operations officer and senior wealth advisor at Strategic Wealth Partners, an Independence, Ohio-based firm with more than $500 million in assets under management.

"As much as it might pain you to spend that down, it's for a rainy day and there was a monsoon in March," said Zabiegala.

This also keeps stock investments in the game for big rebounds, which also happened this year. For example, an investor would have only needed three months to six months of living expenses in an emergency fund this year to avoid taking losses during the March meltdown, said Lineberger at Seaside Wealth Management. This approach would have also kept investments in the market for the record-breaking rebound rally stocks had after March. 

Make a plan and stick to it 

Financial advisors also recommend that you begin saving for retirement as soon as you can to give yourself the longest runway possible to accumulate wealth. Then, before you leave the workforce to live on your savings, it's a good idea to rebalance your portfolio to guard against risk.

"We want to minimize the downside as much as possible," said Zabiegala. "We're trying to get on the kiddie roller coaster after getting off the big-boy roller coaster."

That means considering your long-term goals for retirement and rotating assets between stocks, bonds and other investments to strike the right balance.

Advisors also note that the traditional portfolio balance of 60% stocks and 40% bonds may no longer be the best bet for retirees. Instead, investors may want to consider shifting that allocation to include other assets such as private equity, commodities and real estate to further manage risk, said Zabiegala.

Have the discipline to stick to your plan even when it doesn't feel like the right thing to do.
Brad Lineberger
president of Seaside Wealth Management

It's also important for retirees to shift their investment thinking to protecting their assets from growing them or aiming for the highest return.

"Managing the risk is a really important part," said Leyla Morgillo, a CFP with Madison Financial Planning Group in Syracuse, New York, which oversees about $200 million in assets. "It's not about trying to shoot for the highest rate of return you can, it's about protecting what you have."

To stay committed to this goal, advisors recommend making a plan or road map for retirement investing long before you leave the workforce. This will act as a safeguard against making bad emotional decisions with your investments during extreme market events.

"Have the discipline to stick to your plan even when it doesn't feel like the right thing to do," said Lineberger at Seaside Wealth Management. "Checking your emotions at the door is the hardest aspect of being a successful investor but it's the most important thing to do."

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