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Over the past 12 months, American investors have experienced a rocky stock market. But the United States has always bounced back after recessions, market crashes and other problems, so panicking is the last thing you want to do when the market fluctuates.
Even in times of extreme volatility, we should continue to invest with confidence and trust our investments.
Understanding market volatility
Volatility itself refers to how much the price of a stock or bond fluctuates over a given period of time. High volatility is when large, sometimes unpredictable, price changes occur. When we experience low volatility, the market is more stable.
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These significant swings are usually caused by a large number of investors either selling or buying investments at the same time. Recently, concerns over the economy, inflation, and interest rates have been raising investors’ anxiety, leading to volatility in the market.
When investors are unsure of what is going to happen, prices are likely to swing dramatically in either direction.
Another huge influence on the market: The Magnificent 7. This is the informal term for seven of the largest and typically most influential companies in the stock market. Because of their large size, these seven stocks have a disproportionate impact on the entire stock market’s performance.
A few of these top stocks are Amazon (AMZN), Apple (AAPL), Meta (META) and Tesla (TSLA), and they account for more than 30% of the S&P 500. This concentration makes the market highly sensitive to news from just a few companies.
Volatility on Wall Street isn’t uncommon. I often tell my clients to think of investing as a risk and reward system. Many stocks have been doing well lately, leading to high rewards. However, with big gains come big losses, so you have to approach every investment knowing the risk.
Know what to pay attention to
Anyone who has market-driven assets will be impacted by changes, and even though we are seeing tough times, it’s important you don’t make any rash investment decisions. While we cannot predict what happens on Wall Street, we can keep an eye on any changes.
Make sure you are following what the Federal Reserve is doing, as both a cut and a pause on rates can cause more panic on Wall Street. While we have seen a few cuts and pauses in interest rates, the change in inflation numbers could result in future Wall Street volatility.
Also, pay attention to the Consumer Price Index report and unemployment rates, as large changes can make investors nervous. We have seen previous reports cause markets to fluctuate as investors react to any breaking news.
Look at the recent layoff news at Verizon or UPS — many investors took this as a sign of the economy diving and made them nervous about their investments.
Finally, it’s important to keep an eye on any political developments. The markets tend to react dramatically to shifts in any administration’s policies, especially when they are significant— as we saw last year with tariffs.
Take steps to safeguard your assets
We may not be able to predict any future moves on Wall Street, but we can prepare for them. First and most importantly, have a plan that is personalized to your situation.
It’s essential to have your own goals and timeline to know your risk tolerance. It may be tempting to pull out of the market when times are tough, but don’t.
If you sell when stocks are low, then you are locking in that loss, meaning you won’t be able to make up for it when stocks rise down the road.
This is one of the many reasons why I tell my clients to diversify their investments. Avoid putting all of your eggs into one basket because this will expose you to unnecessary risk. Instead, consider a variety of assets, such as CDs or annuities, in addition to market-driven ones.
Investing can be intimidating, and there is nothing wrong with asking for help. An adviser will help you assess your risk tolerance and choose investments that are right for your financial picture.
If you are nervous about the future of the stock market and its impact on your retirement plans, we can help. Schedule a free consultation on our website, theretirementsolution.com. No matter how experienced you are at investing, volatility can be nerve-racking, but I tell my clients to remember that it is an intrinsic part of investing.
