How Much Will Market Volatility Really Affect You?
There's no way to sugarcoat it: If you're an investor, you haven't liked what you have seen in the financial markets recently. The effects of the coronavirus triggered a market "correction" – a decline of 10 percent or more – and more volatility is almost certainly on the way. But instead of fretting over your investment statements, you could consider some more positive approaches to this situation.
For one thing, ask yourself this: When do you really need the money from your investment accounts, such as your IRA and your 401(k) or similar employer-sponsored plan? These are retirement accounts, so, depending on your age, you may not need to tap into them for 20, 30 or even 40 years. If so, your losses may be "paper" ones only for now and aren't subjecting you to imminent financial jeopardy.
This isn't to minimize the effect this downturn will have on you, of course – it always takes time to recover lost ground, and there are no guarantees with investing. However, although past performance does not guarantee future results, it is useful to note that, over its long history, the U.S. stock market has typically trended in one direction – up – despite serious and sometimes lengthy declines such as we saw in the Great Depression and, to a lesser extent, the bursting of the "dot.com" bubble of the early 2000s and the financial crisis of 2008-09.
Nonetheless, you may have shorter-term goals – a wedding, down payment on a home, overseas trip, etc. – for which you need to save. For these goals, though, you wouldn't want to touch your IRA or 401(k), anyway, as you would likely face taxes and penalties. Instead, you will want your money invested in liquid, low-risk accounts that will be minimally affected, if at all, by declines in the financial markets. These vehicles might include Certificates of Deposit (CDs), money market accounts and even good old-fashioned U.S. Savings Bonds, all of which offer the protection of principal and can pay higher rates than traditional bank savings accounts.
But you might also have longer-term goals that can be addressed through investments that may be somewhat or largely free of the effects of market volatility. For example, to supplement your retirement income, you might consider a fixed annuity, which can provide you with a guaranteed interest rate and, depending on how it's structured, an income stream you can't outlive.
Apart from the issue of when you might need money from your investment accounts, you might want to ask yourself another question: Just how much of my net worth is tied up in my portfolio? If you're like many people, you have other assets apart from your investments. If you're a homeowner, consider your house: Has it dropped in value at all during the recent market decline? Probably not. Do you still have just as much equity in it as you did a month ago? You might have even more. In other words, the value of your investments may have dropped a certain percentage, but the decline in your overall net worth may well be significantly smaller.
So, here's the bottom line: Large drops in the financial markets aren't much fun for investors – but that doesn't mean the bottom has dropped out on your financial future. Keeping things in perspective is a good move in all of life's endeavors – including investing.
This article was written by Edward Jones for use by your local Edward Jones financial advisor. . Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. For more information, see EdwardJones.com.