Time to read: 4 Minutes
If there is one economic certainty, it’s this: the market is going to change. Rises, dips, and even crashes are inevitable certainties, which means the question is never if market changes will happen, it’s what those changes will be, how long they’ll last, and when they’ll happen.
Of course, knowing that downward trends, market crashes, and even recessions will happen at some point doesn’t make them any easier to stomach. Watching the value of a carefully curated portfolio tick downwards, worrying about job security, and wondering if you’ll need to shift your goals and time horizons isn’t easy, and at times, it can be downright scary.
This is especially difficult when you’re considering making a big change that affects your finances, are approaching a large life milestone, or are already in the thick of one. Luckily, there are things you can do to prepare for the market’s inevitable ups and downs.
Preparing Yourself Mentally and Emotionally.
When the markets are in a good or even neutral place, it’s easy to forget that they will trend the other way. However, it’s the perfect time to consider what a downward swing will mean for your finances and how it will make you feel.
Think about how much money you have invested. How would it feel to lose 10% of that? What about 20%? If that were to happen, what would the best logical course of action be?
This exercise is incredibly important because when markets do experience fluctuations, people often don’t have a plan and make emotional decisions. In a positive market swing, they may invest carelessly without thinking about how much extra risk they’re taking on. On the other hand, when markets start to trend downwards, they make decisions based on fear that impede their ability to bounce back when the markets inevitably rise again. This exercise may also help you think more critically about your risk tolerance.
Having a strategy and a plan often stops people from making snap decisions, but when you’re approaching a large milestone, such as retirement, career changes, or purchasing a house, you become especially vulnerable to that fear.
Stick to Your Plan.
There may be specific circumstances where this isn’t the case, but more often than not, sticking to your financial plan is the best way to approach a volatile market. Just as unfavorable market conditions are inevitable, so are favorable ones, and what goes down will come back up. Simply put, if you don’t need to sell your investments, don’t! They will regain value when the markets trend upwards, and selling them at their lowest point means you’ll likely lose money in the long run.
Many people consider investing more during a recession when stocks are at their lowest, and while this is a great strategic move for some people, it may not be for others. It’s important to consider your risk tolerance, what kind of cash you have available to withstand volatility if the markets continue to drop, and if you have a reliable source of cash flow that won’t be negatively affected by the fluctuations.
Of course, sticking to your plan only works if you have a financial strategy and portfolio structured to optimize your risk tolerance and goals. A good investment plan is designed to weather good and bad market conditions, so sticking to your plan is the best course of action the vast majority of the time.
Preparing for Specific Milestones.
Economic downswings are, understandably, more stressful when you’re in the midst of a large life change or preparing for a big milestone. Keep reading to learn how to navigate these changes when downward swings in the market seem imminent.
Retirement.
While positive market conditions feel great in retirement, it’s likely the scariest milestone to face during downturns and market crashes. The reason for this is simple. While people in other stages of their lives can wait out negative conditions rather than tap into their portfolios, those in retirement are likely tapping into it regularly as a primary source of income. Without any new funds being added to your nest egg, you may be concerned that you won’t be able to ride out the storm, especially since nobody can say for certain how long it’ll last.
This is where a strong financial plan and strategic structuring become incredibly important.
At The Tranel Financial Group, our income and growth bucket strategy is structured specifically to protect long-term against market fluctuations. While one bucket, the income bucket, is used for regular monthly expenses, the growth bucket remains untouched. This allows a great deal of your portfolio to stay intact, weather the downward swings, and grow alongside the market once conditions improve.
If you’re starting to plan for retirement when the market takes a sudden dip, it’s understandable that you may start to feel uneasy about making such a big move. It’s never a bad idea to take a minute, think about your circumstances, and meet with a financial advisor.
You may find that you’re in a great position to retire regardless of the market or that you’d benefit from pausing until things even out. Even if you’re in the perfect financial position to retire, if the stress from fluctuating markets will keep you from being able to enjoy retirement, it may not be a bad idea to wait a few months and reassess your plans.
Career changes.
Perhaps you have an attractive new job offer on the table but are worried that economic uncertainty makes it a bad time to make a career move. Or maybe you’ve been thinking about making a change but wonder if you should wait until conditions stabilize.
There really is no right way to approach career changes because it depends so heavily on the specific circumstances, industry, role, and market conditions. With that in mind, you shouldn’t necessarily write off making a career change if a great opportunity arises. Instead, consider what industries or companies are most likely to be impacted negatively by current market conditions. This may include high interest rates, challenges within certain sectors, international concerns, consumer spending trends, and more. If you’re considering moving to a role in an organization that is likely to be impacted heavily by poor market conditions, it may not be the best time to make a move.
Changing careers is a big decision regardless of what the economic conditions are, but a career change that is attractive during stable market conditions can still be a great opportunity during times of change.
Buying a house.
Making any large purchase – not to mention one that you may be paying off for 30 years – is a big decision. Looming economic uncertainty may make you nervous, and it certainly is a factor to consider, especially if you’re worried about the stability of your job or cash flow.
However, if you’re in a good financial position to buy a home and you feel confident that your income won’t be negatively affected by changing market conditions, there isn’t necessarily a reason you need to wait. Sure, it’s possible that an economic downturn may lead to lower housing prices, but oftentimes home prices are largely unaffected or continue to rise regardless of unfavorable market conditions.
If you’re buying a house that you plan to be in long-term, economic changes likely won’t negatively impact you in the long run. Property tends to increase in value over time, so even if homes lose some value, odds are it will correct and the value of your home will continue to grow by the time you’re ready to sell.
However, if you’re planning to buy a house to live in temporarily, like a starter home you plan to be in for only a few years, it’s a good idea to wait for stable conditions. This is because, if housing prices do drop, they may not recover before you are planning to sell.
Starting a family.
The age-old adage is true: there is no one perfect time to start a family. There are a host of uncertainties that come with any large milestone, and we wholeheartedly understand why people may be hesitant to make such a large decision, especially one with obvious financial implications, when market changes seem imminent.
When preparing to expand your family, regardless of economic conditions, check how much money you have in your emergency savings and consider padding it. Create a sample budget to see if your current income will realistically cover the added expenses. If it does seem like the market is about to shift, it’s important to consider how secure your job and income are and what your plan is should there be a loss of income.
The market is always at risk of fluctuations, so regardless of when you start a family, it’s important to make sure you’re protected and that you have a financial plan in place.
The best way to navigate changes in the market is to make sure your finances are structured correctly, you’re comfortable with the amount of risk in your investment portfolio, and you have a plan in place for the inevitable changes in market conditions – whether they be good or bad.
If you’re unsure of where you stand, want to know how protected you are, or are navigating a large milestone during a time of uncertainty, having an open conversation with a financial advisor will help to ensure that you’re on the right path.
All securities through Money Concepts Capital Corp. Member FINRA / SIPC. Investments are not FDIC/NCUA insured. No bank or credit union guarantee. May lose value. Money Concepts Advisory Service is a Registered Investment Advisor with the SEC. The Tranel Financial Group is an independent firm not affiliated with Money Concepts Capital Corp.
Note: This content is for informational purposes only and should not be considered financial or tax advice. Please consult with your financial or tax advisor for guidance tailored to your specific situation.