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3 Keys to Thriving During Volatile Markets Thumbnail

3 Keys to Thriving During Volatile Markets

The key to becoming a successful investor isn't just following a comprehensive financial plan. It's also overcoming the emotions and the biases that sometimes try to steer us away from that plan.

Those jitters tend to spring up in volatile moments like the one we're experiencing right now. Despite another positive jobs report for the month of June, headlines about the markets and inflation are at the front of most folks' minds. How you respond -- or don't respond -- to those headlines in the weeks ahead could have a big impact on your long-term financial future.

Here are three strategies for weathering this bout of volatility that I hope you'll think about and discuss with your financial advisor.

1. Be aware of common cognitive biases. 

Cognitive biases are those little shortcuts we take to make complex problems and decisions more manageable. Instead of bringing these big issues down to size, our cognitive biases give us an incomplete picture of what's really going on. These unconscious errors in how we're filtering and processing information can lead us to snap decisions that feel good in the moment but rarely set us up for success in the long run.

Try to stay on high alert for these three biases in particular:

  • Confirmation Bias We tend to consume information that confirms rather than challenges opinions we already have. Social media often enhances this "echo chamber" effect because our friends and family often have similar views to ours.
  • Information Bias When we're facing a difficult decision, it might seem like a good idea to gather as much information as possible. But it can also be difficult to separate relevant information from irrelevant information.
  • Anchoring Bias Our choices can feel more grounded if we "anchor" them to a data point that we connect to in some personal way. For example, if you've spent your career in computer programming, you might feel better about investing heavily in tech, even if that makes it harder to balance your portfolio.

Of course, identifying and controlling your own biases is easier said than done. Just remember that rarely, if ever, is there a long-term financial move that you need to make this second. That kind of thinking leads to dangerous "market timing" strategies that throw long-term perspective right out the window.

2. Anticipate and prepare for market volatility. 

I often advise folks to think about volatility as a "tax" that investors pay on the wealth that the markets build over time. A good financial plan expects volatility and includes contingencies to help investors continue to thrive in all market conditions.

One strategy we like at Keen Wealth is to create "money buckets," cash reserves that are designed for specific purposes, such as funding investments over different time horizons, emergency home or medical expenses, or covering living expenses during volatility. For example, during this current downturn, we might advise folks who aren't struggling to pay their monthly bills to tap into investment cash reserves and make extra contributions to a brokerage or retirement account, essentially "buying low" on securities that will appreciate once the market recovers.

Why are we confident that the market will eventually go back up? Well ... because to date, every decline on record has been followed by a return to new highs and beyond!

In a recent article, Charles Schwab analyzed bull and bear markets for the S&P 500 going back to the late 1960s. The average bull market lasted 6 years and delivered an average cumulative return on 200%. The average bear market lasted 15 months and delivered an average cumulative temporary decline of 38.4%.

Narrowing our perspective a little bit, think back to the early days of the pandemic in 2020. Lockdowns, layoffs, businesses closing, no vaccines, political turmoil in an election year.

The resulting bear market lasted just 33 days.

One tip on maintaining perspective during volatility: review your weekly and monthly budget as you normally would, but don't give your annual returns or your retirement accounts that same scrutiny. Checking in daily or hourly on accounts that are designed for long-term growth is like looking through a keyhole at a wall-sized painting. You're just not taking in the full picture. That's what folks who panicked during the pandemic bear market did. A month later, they had a little extra cash in hand, but they were missing out on the growth they would have enjoyed as those securities they sold rebounded.  

3. Acknowledge your emotions.

How are you feeling about your money right now?

Are you nervous about the health of your investment accounts? Are you scared about inflation throwing off your monthly budget? Are you ambivalent about your plans to retire when the economy is so unsettled?

Letting those emotions in is a far more productive strategy than trying to box them out. Once you've identified and accepted your feelings, you can start drilling down into even more productive questions, such as "Why am I feeling this way?" In many cases, our current emotions have less to do with this particular moment than they do with some past, formative experience around money that continues to affect our financial judgement, for better or worse.

Believe me, I can relate. I've written before about the financial struggles my father and I endured when I was growing up. It took me a long time to learn how to repurpose those feelings in a positive way so that I could help other people take control of their finances and, hopefully, avoid some of those same hardships and keep their feelings from negatively impacting their money.

Whatever you're feeling right now about the markets, the economy, or your financial future, my team at Keen Wealth is ready to talk to you. Make an appointment and we'll review your plan to see how well you’re doing during this volatile moment and how staying on course for long-term prosperity can help you.

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

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The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.

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