How to Handle Market Volatility at Every Life Stage

Key Takeaways

• The temptation to tinker with your portfolio in volatile markets can feel reasonable but could hurt your portfolio in the long run.
• Your investing choices should align not just with your life stage but also your time horizon for the money.
• Early and midcareer investors have the time to recover losses from market volatility. They can stay heavy in equities while starting to build resilience into their portfolios.
• Preretirees should look to transition their portfolios to safer assets, with a goal of avoiding sequence risk.
• For retirees, asset allocation, portfolio maintenance, and spending choices can help protect your nest egg.

Margaret Giles: Hi, I’m Margaret Giles with Morningstar. The right response to volatile markets isn’t one-size-fits-all. Joining me to discuss how people at various life stages should respond is Christine Benz. She’s Morningstar’s director of personal finance and retirement planning. Christine, thanks for being here.

Christine Benz: Margaret, great to see you.

Handling Market Volatility by Not Making Changes

Giles: In general, you discourage people from making big changes in their portfolios during those volatile periods. Why is that, and what’s a better way to approach things?

Benz: Yeah, a couple of reasons why I think it’s not a great idea to be tactical. One is that it’s very difficult to get right. It might provide some peace of mind to get out of the market when things are down, and you just don’t want to deal with all the red ink in your portfolio. But I think that’s quickly replaced with this worry like, “Oh wait, things seem to be starting to reverse themselves. Is it time to get back in?” So it’s just hard to do. In fact, when we look at the universe of tactical asset-allocation funds, kind of market-timing funds that are frequently making changes to their asset allocations, they haven’t been that great relative to an inexpensive 60/40 portfolio. And then the other major reason is more philosophical, which is that when you look at the long-term growth of US stocks, in particular, what you see is, if you stretch it out over a very long period of time, you see this very steady upward trajectory.

And the downturns that felt absolutely terrible while they were going on, like the 2007 through 2009 period or one that you’ll recall, 2020, they’re just little blips on the screen. So, to the extent that you can tune out the noise with your long-term equity portfolio, that redounds to the benefit of you as an investor.

How Young Investors Can Navigate Volatile Markets

Giles: Right. I want to talk about the different life stages, and let’s start with those who are in their 20s or 30s, so those early career accumulators. What steps might they want to take during volatile periods?

Benz: A really counterintuitive thing, especially for new investors, is that when it feels bad to be an investor, that’s actually a better time to invest than when there’s euphoria and everyone’s excited about investing. And so that’s very hard to internalize and sort of implement in your process. I would say the best thing to do at that life stage is to try to tune out the day-to-day market action and set yourself up for success by putting your contributions on autopilot, being in a reasonably equity-heavy portfolio, maybe mostly equity-heavy for retirement, and just letting those contributions do the work. And the nice thing about autopilot is that you’re probably not going to get in there and reverse your contributions in times of trouble. You probably have other things that are keeping you busy. So it turns out that that’s a great way to invest. And for people at this life stage, I would also say they want to think about the money that they might have set aside for nonretirement goals.

So inevitably, people are looking at things like a new home purchase or home remodeling or a big vacation or a wedding or whatever the case might be. They have shorter-term goals, things that they’d like to do with their money. That money, if it has a time horizon of fewer than five or 10 years, should not be in the stock market. So even if people are young, they still want to make sure that they have that portion that is targeted toward near-term spending needs in something safer, some combination of cash and high-quality bonds.

Giles: Right. So aligning with the time horizon, not just the age.

Benz: Exactly.

Managing Market Volatility When You Have Time to Recover Portfolio Losses

Giles: Let’s look at the midcareer types, so maybe 40s and 50s. Presumably, they wouldn’t want to have such equity-heavy portfolios as those who are just starting out, but what steps should they take instead?

Benz: The good news for this group is that they still have a fairly long time horizon to retirement, and they’ve also been stress-tested probably through a few different market cycles. So they know that, even when it feels really scary, stocks typically recover. So they should be maintaining fairly heavy equity weightings. And I would say for someone retiring in say 2040, they would probably want to have three-fourths of that portfolio in equities. A globally diversified equity portfolio, I think, makes sense for people at all life stages, certainly the younger cohort, but this middle cohort, too, but they would want to start to be adding a complement of safer assets to the portfolio and gradually kind of stocking up on those safer assets. So if the bulk of my portfolio is in equities at this life stage, I would still want to have that complement of high-quality bonds that I’m starting to build up in this retirement portfolio.

How Preretirees Can Steer Their Portfolios Through Volatility

Giles: Right. So you think that risk management is particularly important for those who are just about to enter retirement, maybe a couple years away. So why is that, and what steps should they be thinking about as they approach retirement?

Benz: This is a group that I’m worried about, frankly, Margaret. Just anecdotally, in my conversation with older adults, they’ve had a great experience in stocks, and that’s been reinforced by many years of strong stock market performance. So a lot of folks, I think, are letting it ride with very equity-heavy portfolios, and they should have ample equities in their portfolios, especially if their retirement is going to be 20 or 30 years or even more. But the key thing you want to be mindful of at this life stage is that what’s called sequence risk is your biggest enemy early in retirement. That if a bad market environment shows up early in your retirement and you haven’t taken steps to derisk at least a portion of that portfolio, then you’re really in trouble because your only choice is to spend from that rapidly dwindling equity portfolio. So you want to build in, I would say, five to 10 years’ worth of portfolio expenditures as retirement draws close, you’d want to start building that up in safer assets, in that combination of high-quality, short- and intermediate-term bonds.

And then if retirement is really close at hand, you probably want to have a little bit of cash in the portfolio as well to protect yourself against another 2022 when we saw both stocks and bonds drop at the same time.

How Retirees Can Protect Their Investments From Volatile Markets

Giles: Right. To wrap up here, let’s talk about those who are already retired. What should they keep in mind as they’re actively drawing upon their portfolios to cover their living expenses?

Benz: At this life stage, you have a couple of things in the toolkit to protect yourself against volatile markets. One is that asset allocation that we talked about, making sure that you are maintaining a component of safer assets and replenishing it. If you’re actively spending from it, it’s got to be topped up. Ideally, you would do a little bit of maintenance at the end of the year, where if you’ve spent from your portfolio and your safer assets have declined, you’d want to find something to top them back up. And then if a really bad market environment shows up at this point in your retirement and you’re actively pulling, another defense you have—and we’ve written and talked a lot about this—is that if you possibly can pull in your spending a little bit in those periods of trouble and reduce your spending, that just protects the nest egg that is there to recover when the market eventually does.

Giles: Right. Helpful to think about this in terms of life stage. Christine, thanks for taking the time.

Benz: Thank you so much, Margaret.

Giles: I’m Margaret Giles with Morningstar. Thanks for watching.

Watch What You Need to Consider Before Retiring Early for more from Christine Benz and Margaret Giles.