When financial markets are jumpy—as they have been during the past few weeks and are expected to remain—the temptation is to take the helm and attempt to steer your investments through the rough waters.
But the best reaction is not to react—at least, not in the way that your emotions dictate, according to experts. "The important thing is not to focus on short-term declines in the market, but rather your ability to meet your long-term goals," said Kimberly Bridges, PhD., director of financial planning at BOK Financial®. "Making emotionally charged decisions is the biggest threat to your long-term plan."
Don't try to "time" the volatility
Keeping calm during volatility can be difficult—especially in a 24-7 news cycle with equity markets reacting to global fears, such as the Russia-Ukraine conflict, or concerns closer to home, such as inflation and rising interest rates.
Some investors, especially newer ones, might be tempted to try to "time" the markets—that is, to try to predict the best time to buy or sell stocks—to make money off the volatility. Yet the key to meeting your long-term goals is creating—and sticking to—a financial plan, not market timing, according to Bridges.
Unfortunately, that's not what most people do. Despite the commonly accepted investment wisdom to stay calm when markets aren't, only around 24% of American investors with one year or less of investment experience chose to stay the course during 2020's market volatility, according to a 2021 survey by the Motley Fool. By comparison, more than 30% of investors with 10 or more years of experience made the decision to ride it out, the survey found.
The No. 1 reason (about 42% of respondents) why investors chose to sell stocks during the volatility was to prevent financial losses. Coming in a close second, nearly 40% of survey respondents said they sold stocks because they needed cash.
When deciding what to do with your investments in times of market volatility, it's important to keep in mind that a downturn may be just a bump in the road rather than a change of course for an investment's future.
"Remember that pullbacks are typically followed by rebounds with above-average returns," Bridges said. "Only those who stay invested will ride the rebound."
What to do during market volatility
Instead of making quick decisions to buy or sell, here are some steps you can take to maintain a longer-term view:
- Turn off the news—at least for a while: Paying too much attention to the news may make you focus too much on the volatility, which, in turn, may make you react emotionally, according to Bridges.
Sensational news, Bridges said, "works against the rational side of your brain by firing stress hormones and igniting the emotional side of your brain—the side prone to making irrational decisions."
- Do something calming: "Managing emotions is very important during periods of uncertainty," Bridges said. That's why it's so important to do something that calms you, such as taking deep breaths or going for a walk.
- Take a "time out": You don't have to go sit in a corner but taking a "time-out" before making any financial moves can help you prevent yourself from making any hasty, emotion-driven decisions.
- Meet with your financial advisor: To help alleviate your stress, meet with your advisor to discuss your concerns and whether your financial plan is still on track to meet your goals. Also, keep in mind that advisors conduct "stress tests" on financial plans for volatility and risk as part of the financial planning process, Bridges said. So even though a market downtown may have caught you off guard, it doesn't mean your financial advisor and financial plan weren't prepared for it.
- If you don't have a financial plan, make one: You can't control market volatility, but you can have a compass—that is, a financial plan—to keep you on course during the bumpy ride. "Rather than worrying about what the market is doing, focus on defining your financial goals and determining if you are on a successful path to meet those goals," Bridges suggests.
Taking those calming steps during market volatility can help you avoid acting irrationally, and save you from some gray hairs in the process. However, if you're still stressed by the news of the day, keep in mind that volatile markets are nothing new: they have come and gone in the past.
As Bridges says, "Remember, this too shall pass."