4 Ways to Take Control in an Uncertain Market

Key Takeaways

• When markets are uncertain, it’s helpful to take a step back and think about all the things that we as investors exert no control over, like the direction of interest rates, the direction of the economy, inflation, the dollar, and more.
• Revisiting your savings rate or your spending rate in your retirement could be something investors can have control over in a volatile or uncertain market.
• Take a good look at your asset allocation during times of market uncertainty.
• Keep an eye out for tax-saving opportunities.

Susan Dziubinski: Hi, I’m Susan Dziubinski for Morningstar. After having a pretty good run in the first half of 2024, stocks hit a road bump during the summer on concerns that interest-rate cuts won’t come quickly enough to avoid a recession. Joining me to share some strategies that investors can use to take control in uncertain markets is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning and host of The Long View podcast. She’s also the author of a new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.

Thanks for being here today, Christine.

Christine Benz: Susan, it’s always great to see you.

How to Invest in an Uncertain Market: Buffett’s ‘Too Hard Pile’

Dziubinski: One key strategy that you think investors should be thinking about for taking control in sort of volatile and uncertain markets is what Warren Buffett has called the “too hard pile.” Tell us about the too hard pile.

Benz: Well, I think it’s helpful to take a step back and think about all of the things that we as investors exert no control over. So, the direction of interest rates, the direction of the economy, inflation, the dollar, all of those things, yes, interesting to keep an eye on because they affect the world that we all live in. They might affect our investments a little bit, but we have no influence over them. So just say, you know what, all of that, I’m just going to put it in my category of things that I’m not paying close attention to. And that, I think, is clarifying in that it gives you, if your too hard pile is this, it gives you a sense of like, what are the things that I as an investor do exert some level of control over? And it’s a pretty small list. And to me, that’s a comforting thought in volatile times.

Revisiting Your Savings and Spending Rates in Uncertain Markets

Dziubinski: All right. So then let’s get to some of those things that you can control. Now, you think revisiting your savings rate, whether that’s—or maybe your spending rate in your retirement—that could be something you can do in a volatile or uncertain market.

Benz: Definitely. I think it’s one of the best things you can do because this is a lever that we investors do exert quite a bit of control over. It’s something we don’t talk that much about, but how much you put in is going to be by far the biggest determinant of how much you take out. I think a great strategy in an environment where you’re feeling a little bit jittery is just to take a look at, OK, are there places where we can tighten our belt in this household to potentially put more work into our savings? That also happens to be a great way to invest, where you’re putting more money to work when valuations are knocked down a little bit. So just see if you can’t find additional funds to invest.

If you are in retirement, you might feel a little bit stressed out in periods like this, especially stressed out because you’re pulling from what seems like a finite and dwindling resource. So I think it can also be helpful to revisit your withdrawal rate, how much you’re taking out of that portfolio. We publish some research on safe withdrawal rates every year. You can revisit your withdrawal rate annually, and you should, in line with your age and what’s going on with your portfolio. But one of the best practices with respect to withdrawal rates is if you can take a little bit less in market downturns, generally speaking, that means you can take a little bit more when the market is up. And most retirees, I think, are OK with that trade-off.

When Markets Are Down, Should Investors Assess Their Asset Allocation?

Dziubinski: Now, another take-control strategy that you talk about is taking a good look at your asset allocation during times of market uncertainty. But should investors really be doing that when the market’s down?

Benz: That’s a good question, Susan. I tend, for people who are in accumulation mode, and here I would say like anyone under say age 50, the policy of “don’t peek,” which was something that Jack Bogle said was one of his favorite investment rules, I think that really does apply. If you have a sensible asset-allocation mix, and you’ve got a significant share in stocks, well, inevitably you’ll see it ebb and flow as the market does—try to just not pay attention. But I think where it really does start to become more important to revisit your asset allocation is if you are getting close to retirement, if you’re within maybe five years of retirement, take a look at that asset allocation in your portfolio. I think for many investors, they’ve had a tendency to be hands-off as the stock market has just marched up, up, and up. And the net effect of that is that their equity portfolios are probably quite high relative to where they should be if they’re approaching retirement.

So a really tangible way to think about it is if I’m getting close to retirement, I’d want to think about having maybe five to 10 years’ worth of portfolio withdrawals socked away in safer investments. Not all cash, but some combination of cash, short-term bonds, intermediate-term bonds. And if I look at that, if I can see, OK, say my portfolio spending is $40,000 a year, I anticipate in retirement, if I can see that $400,000 set aside in cash in short and intermediate-term bonds, that gives me a lot of peace of mind with that long-term portion of the portfolio. So I think it’s just a good exercise to go through in periods like this. If you’re trying to see if your asset allocation is on track, go with something really tangible as a test of whether it’s on track.

How Tax Planning Can Help Investors Take Control During Market Volatility

Dziubinski: And then your final take-control strategy is keeping an eye out for what you’re calling “tax-saving opportunities.” What might those look like?

Benz: Yeah, this is especially important if we go into some sort of a sustained, meaningful downturn. You do want to take a look for some of these tax silver linings. So the obvious one would be if you’re an individual stock investor, and you purchased shares in a company or companies when they were high relative to where they are now, you can book that tax loss, sell the position, book the tax loss, and the benefit of that is that you can use it to offset gains elsewhere in your portfolio or a certain level of ordinary income. So tax-loss selling is certainly one of the key strategies to look at. Another one to consider is to consider Roth conversions, so converting a portion of your traditional IRA balance to Roth. The benefit of doing that when the market is down is that you pay tax on the amount that you convert. And so if you can convert when the market is down, you can convert more shares with less of a tax effect. So get some tax advice there before proceeding, but that’s another great bear market strategy to consider.

Dziubinski: Great. Well, thanks for the ideas of giving us something to do to take control in these tough times sometimes. We appreciate it. Thank you.

Benz: Thank you, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch The Big Retirement Myth for more from Christine Benz.