Last week, we explored four strategies to maintain composure in turbulent markets. Since then, volatility has only heightened, with the market down by 5% from its previous peaks as of Monday’s close.
Over the weekend, a friend called, clearly anxious about the ongoing market fluctuations. She primarily invests in stocks, but she’s also heavily invested in Treasurys.
I reassured her, “If a 5% dip has you so on edge that it’s affecting your sleep, perhaps the market isn’t the right place for you.” She insisted that she values the growth potential the market offers.
She finds herself in a familiar predicament: she wants to enjoy the growth potential of the market but without the associated risk.
This is a common dilemma. There aren’t many places you can park your money and potentially reap the 8% to 10% average annual returns the stock market offers. However, this growth isn’t guaranteed every year. The market fluctuates; for instance, it soared by over 20% in both 2023 and 2024, but it also plummeted nearly 20% in 2022. And some years can be grimmer.
I reminded my friend of her solid position with her significant Treasurys holdings. Thanks to her fixed income, she’ll be able to cover her financial needs for many years.
In my column last week, I emphasized the importance of considering your timeline. This is a crucial yet often overlooked aspect for investors.
If your investments in the stock market won’t be needed for several years, daily market shifts should be of little concern. Even a severe bear market will hardly impact a portfolio that won’t be tapped for a decade or more unless you are adding to your investments during downturns, which can be quite beneficial.
Conversely, if you anticipate needing those investment funds within a few years, shielding them from market volatility is wise. My general advice is to withdraw any funds from the market that you plan to use within the next three years.
So much can occur over that span. Should your time horizon be longer, you’re likely in good shape, as most bear markets last less than a year.
Here’s how I personally managed a situation with a specific timeline in mind.
We utilized 529 accounts to save for our kids’ college expenses.
By the time they reached their junior year in high school, I became more conservative with their investment portfolios, shifting about 25% from stocks to stable income options and cash. Each following year, I shifted another 25% mostly to cash. Recognizing that a continued market rise like in 2023 and 2024 wouldn’t grow these funds, I wanted to ensure that even in a downturn, we had enough to cover tuition costs.
The market’s strong performance worked in my favor. It allowed me to sell high, letting us liquidate fewer shares than we might have needed to previously. This left us with tuition funds at the ready and some extra to continue growing with the market.
In contrast, I take a more passive stance with my retirement accounts. With potential retirement years away, fluctuations like those in 2022 or the current dip don’t faze me financially.
Historically, the market trends upward over time, and while periods of poor performance may arise, the long-term trend spanning over a century is unlikely to change.
So, focus on your timelines. Divide your investments into different “buckets” — short, intermediate, and long term — and adjust them according to your needs, not the market’s whims.
Doing so can provide a sense of control, improve peace of mind, ensure liquidity for short-term needs, and maintain exposure to the market’s long-term growth trajectory.
