Volatility is a term thrown around a lot on Wall Street and in personal finance circles. But what does it mean, and how does it impact your ability to meet your financial goals? Volatility refers to the fluctuations of a security’s price over time. In other words, volatility measures how much prices move up and down. This can be good or bad, depending on your perspective and whether your portfolio is constructed to meet your objectives. For example, suppose you don’t need to access your investments in the short run. In that case, market volatility can benefit you by investing new cash into the market when it is experiencing a significant drawdown. Alternatively, if you are actively taking distributions from your investments during retirement, volatility may have a negative impact on your ability to meet your financial goals.
WHAT IS VOLATILITY?
Before discussing how volatility impacts your portfolio, we need to discuss how it works on a broader scale. Certain Investments are inherently more volatile than others. For example, stocks are more volatile than bonds, and this is because bond owners have the first rights to a company’s (or government) cash flows and assets. When you buy a bond, you’re lending money to a government or corporation in exchange for regular interest payments over time. You know exactly how much money you’re going to get back and when you’re going to get it. However, when you buy a stock, you’re investing in a company, and you don’t know how much money you’ll get back or when you will realize the greatest return. This is because the value of a stock can go up or down depending on various factors, such as the company’s performance, the overall economy, interest rates, etc.
This volatility is what causes people to panic sell. They see their investment lose value and think they’re going to lose all their money. This couldn’t be further from the truth. Volatility is a natural part of investing, and it’s something you need to accept if you want to invest in the stock market. The key is not to panic sell.
HOW DOES VOLATILITY IMPACT YOUR ABILITY TO MEET YOUR GOALS?
Now that we’ve discussed what volatility is and how it works, let’s discuss how it impacts your portfolio and ability to meet your financial goals and objectives. Volatility can affect your portfolio in several ways, but the most important way is through losses. When the stock market becomes volatile, stocks tend to lose value. This is because investors are selling their stocks, and their demand decreases. As a result, the price of stocks goes down.
This volatility can be especially harmful to investors who sell stocks at reduced prices. When the stock market becomes volatile, some investors will panic sell to minimize their losses. This often leads to a domino effect as more and more investors sell their stocks. Panic selling can cause the stock market to decline even further, leading to even more significant losses for investors. Others may need to sell stocks to fund their financial goals (retirement, education, etc.).
However, volatility can be a positive impact on your portfolio. When the stock market becomes volatile, it provides opportunities for investors to make money. Volatility causes the prices of stocks to move up and sell high. Volatility is a natural part of the investing world, and you need to accept it if you want to invest in the stock market.
Investors must understand their financial goals and make sure their portfolio’s asset allocation is designed to limit market volatility’s impact on their ability to achieve their goals. That is one of the core value adds that a wealth adviser can offer their clients.
ASSESSING YOUR PORTFOLIO NEED
Many investors need to take distributions from their portfolios every month or year, particularly retirees. It is essential that you understand what that number is and how taking the distribution monthly vs. annually may change how market volatility impacts the likelihood you will be able to meet your financial goals.
If you need to know how much your portfolio needs, use this simple formula: (expenses + taxes – SS + pension = portfolio need).
Every portfolio is different, and there are no one-size-fits-all investors. Tailoring your portfolio to fit your specific needs and goals is especially important for planning your income needs.
By taking distributions monthly, you can limit the impact of market volatility on your portfolio. This is because you will be selling assets every month, thereby reducing the risk of selling a significant amount of assets at a low point in the market. Volatility can significantly impact your portfolio, and it’s essential to be prepared for it. By understanding how volatility works, you can make informed decisions about your portfolio and ensure that you can survive market volatility.
If you need help deciding what investments are best for you or want someone experienced in handling volatility-prone portfolios, we’re here! Our team will get to know you and guide you on investing strategies explicitly tailored to the needs of investors during periods of volatility. In addition, our advisors will create an asset allocation strategy designed around mitigating risk while still meeting your long-term goals.