Market Volatility: Are You In or Out?

Market Volatility: Are You In or Out?

People often see themselves as either “invested” or “not invested” in the markets, or consider their holdings as either “risky” or “not risky.”

But investment risk is not binary. Because of this either/or mindset, investors may not always consider all the other risk levels in between. There are endless options between putting money under your mattress and betting it all on black.

The Risk of All or Nothing

I walk through this with clients all the time. When they reach for high-flying returns from aggressive investments, we talk about how the potential benefits may not outweigh the risk they’re taking on—and what it could mean for their future.

The same goes for avoiding risk altogether. The temptation to sell everything to avoid further risk is, itself, a risk. (Learn about other investment risks.) Selling underperforming assets during a market downturn can lock in losses and make it difficult to get back into the market to participate in the next upswing.

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How Does the Fear of Loss Affect Your Choices?

Market volatility often leaves investors nervous about losing money, even though volatility can move account balances both up and down.

“Loss aversion” refers to the preference to avoid losses over an equivalent gain. People would rather not to lose $5 than unexpectedly find $5. Or they’d feel worse about a sudden salary cut of 10% than they’d feel good about a surprise 10% raise.

Why? We don’t want to lose something we perceive we already have, and it changes how we think about investing. It’s important to understand how you might feel when the value of your accounts changes rapidly. 

Gauging Confidence

Example: An investor may be used to investing more aggressively but is nearing retirement.

We ask: If you stay aggressive and your returns are up 25%, how will that change your life? Extra purchases? New home? More vacations?

Typical answer: No, not really. I probably wouldn’t spend more.

Turns out, a 25% return isn’t usually enough to make people feel wealthier. They may have not been counting on that kind of performance, so it may not significantly change their retirement plans.

Then we ask a follow-up question: What if the value of your portfolio goes down 30%, 40% or 50% right before retirement? How will that change your life?

Answer: I would reevaluate my plans and my spending.

As the value of their portfolio went up over time, that amount became “their” retirement nest egg. Settling for anything less than that may be hard to stomach.


Be Risk-Appropriate for Where You Are

Your portfolio should change over time, as should your relationship with risk. But it’s never a black and white solution. You’ll need a mix of investments—some that have the potential to grow over time (e.g., stocks) and some that can help you preserve what you have (e.g., bonds and money markets).

Your allocation, or the portion you invest in each type, depends on you: your age, how close you are to retirement and how much money you’ve already saved. 

Younger investors often start with smaller account balances. A stock-heavy portfolio might seem riskier, but theoretically, with lots of time to add to savings, market ups and downs are absorbed before retirement.

As your salary increases, commit to investing as much as you can. Your regular contributions and the return potential of stocks or similar investments are key to growing an account balance. A smaller allocation to bonds can help hedge against market downturns.

Risk looks different if you’ve got more to lose, especially if you’re counting down until your last paycheck. After years of saving, you’ll want to preserve your money. Balance growth potential with conservative investments as a buffer in case of market volatility.

You’ll need to have a plan to make sure your money lasts. Calculating your expenses can help you determine a suitable withdrawal rate from your investments. Too little and you’ll have to adjust your lifestyle. Too much, and you’ll deplete your accounts. (Want to learn more about income strategies? Download our Retirement Income brochure, or talk to a consultant.)

Source: American Century Investments. The examples indicate hypothetical allocations and increased contributions over time and are not meant as financial advice.


Are You Ready to Face What’s Ahead?

Your confidence should be the core of your investment plan. If market volatility is rattling your resolve, it may be time to reevaluate your current situation. Together, we can create a plan that takes all your needs into consideration. 

Let’s Do This, Together

We’re here to help you manage portfolio risk in turbulent times.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Diversification does not assure a profit nor does it protect against loss of principal.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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