Market Volatility and Investing: Why Staying Disciplined Matters
Featuring AJ Flores, CFP®
With investment accounts and real-time market updates available at our fingertips, it has never been easier to see what the stock market is doing. While that convenience can be useful, constant access can also make it tempting to react to every headline, market drop, or sudden rally.
In a recent ABC30 Watching Your Wallet segment, AJ Flores, CFP®, Lead Financial Advisor at Portfolio Advisors Inc., discussed market volatility, emotional investing, and why long-term investors may benefit from focusing less on daily market movements and more on the goals behind their investments.
The Challenge of Investing in a 24/7 News Cycle
There will always be something influencing the markets. Economic reports, interest rate expectations, company earnings, political developments, and global events can all contribute to short-term movements.
“There is always going to be some sort of story of the day that does affect the market and whether it goes in one direction or the other,” AJ explained. “Having that immediate interaction with the apps the way we do does tend to lead to more emotional decision-making.”
When investors can check their accounts throughout the day, normal market fluctuations can feel more significant than they actually are. A temporary decline may create the urge to sell, while a strong rally can lead to fear of missing out.
Neither reaction necessarily considers the reason the money was invested in the first place.
Avoid Making Investment Decisions Based on Emotion
Market volatility is a normal part of investing, but watching a portfolio decline can still be uncomfortable.
For investors who prefer to monitor their accounts regularly, AJ emphasizes the importance of separating observation from action.
“If you are building something for the long term, looking at it day to day doesn’t really change a whole lot of the equation,” he said.
Before reacting to short-term market activity, it can be helpful to revisit a few basic questions. What is the money being invested for? When will it be needed? Has anything changed in your personal financial situation or long-term goals?
If the answers have not changed, a short-term market movement may not require a change to the investment strategy.
Understanding Investment Risk
Investing involves risk, but the appropriate level of risk is different for everyone.
Someone investing for retirement several decades away may have a different investment strategy than someone preparing to make a large purchase within the next few years. Age can be a consideration, but so can income needs, financial responsibilities, time horizon, and personal comfort with market fluctuations.
“We take on this risk with the expectation we’ll be compensated for it in the eventual growth of the stock or the market in general,” AJ said.
The goal is not to avoid every market decline. Instead, investors should understand the risks they are taking and determine whether their investment mix is appropriate for what they are trying to accomplish.
Can Market Volatility Be an Opportunity?
Market declines are often discussed negatively, but volatility can look different for someone who is consistently investing over time.
“If you are investing consistently over time and market volatility occurs, well, you’re actually buying stocks at a discount,” AJ explained. “So volatility can be your friend if you let it.”
For long-term investors who continue making regular contributions to retirement accounts or investment portfolios, periods of lower market prices allow those contributions to purchase more shares than they would when prices are higher.
This does not make volatility comfortable or eliminate investment risk. It does, however, offer another way to think about short-term declines when the goal is still many years away.
Match Your Investments to Your Time Horizon
One of the most important questions to ask before investing is simple: What is this money for?
Money intended for retirement decades from now can generally be approached differently from money set aside for a home purchase, tuition payment, or another near-term expense.
The further away a financial goal is, the more time an investor may have to recover from periods of market decline. As the date of a goal approaches, the balance between growth and stability may need to change.
Connecting investments to specific goals can make it easier to understand why a portfolio is structured a certain way and reduce the temptation to make decisions based solely on what the market did that day.
Time in the Market vs. Timing the Market
Trying to predict the perfect time to invest can be tempting, especially during uncertain markets. The challenge is that no one knows exactly what markets will do next.
“Time in the market beats timing the market,” AJ said. “At any given point, we don’t know what the market is going to do next. A week from now. A month from now. A year from now.”
Waiting for the market to reach a certain level before investing requires getting more than one decision right. An investor has to decide when to stay out and then determine when to get back in.
“Rather than deciding on a certain market threshold to become an investor, it makes more sense to participate along the way,” AJ explained.
A consistent investment approach can help keep long-term goals at the center of the decision-making process rather than short-term predictions.
Building an Investment Strategy Around Your Goals
Market volatility is unavoidable. Emotional decisions do not have to be.
A thoughtful investment strategy begins by understanding your goals, time horizon, financial situation, and comfort with risk. From there, a diversified portfolio and a consistent investment approach can provide a framework for navigating both strong and difficult markets.
At Portfolio Advisors Inc., we believe investment decisions should be connected to a broader financial plan. Markets will continue to move, headlines will continue to change, and uncertainty will always be part of investing. A clear plan can help keep those short-term events in perspective.
If you have questions about your investment strategy or whether your current portfolio still aligns with your goals, AJ Flores, CFP®, and the team at Portfolio Advisors Inc. are here to help.
