What is Volatility?
How Does Volatility Impact Your Ability to Meet Your Goals?
Now that we’ve discussed what volatility is and how it works, let’s discuss how it impacts your portfolio and ability to meet your financial goals and objectives. Volatility can affect your portfolio in several ways, but the most important way is through losses. When the stock market becomes volatile, stocks tend to lose value. This is because investors are selling their stocks, and their demand decreases. As a result, the price of stocks goes down.
This volatility can be especially harmful to investors who sell stocks at reduced prices. When the stock market becomes volatile, some investors will panic sell to minimize their losses. This often leads to a domino effect as more and more investors sell their stocks. Panic selling can cause the stock market to decline even further, leading to even more significant losses for investors. Others may need to sell stocks to fund their financial goals (retirement, education, etc.).
However, volatility can be a positive impact on your portfolio. When the stock market becomes volatile, it provides opportunities for investors to make money. Volatility causes the prices of stocks to move up and sell high. Volatility is a natural part of the investing world, and you need to accept it if you want to invest in the stock market.
Investors must understand their financial goals and make sure their portfolio’s asset allocation is designed to limit market volatility’s impact on their ability to achieve their goals. That is one of the core value adds that a wealth adviser can offer their clients.
Assessing Your Portfolio Need
Many investors need to take distributions from their portfolios every month or year, particularly retirees. It is essential that you understand what that number is and how taking the distribution monthly vs. annually may change how market volatility impacts the likelihood you will be able to meet your financial goals.
If you need to know how much your portfolio needs, use this simple formula: (expenses + taxes – SS + pension = portfolio need).
Every portfolio is different, and there are no one-size-fits-all investors. Tailoring your portfolio to fit your specific needs and goals is especially important for planning your income needs.
By taking distributions monthly, you can limit the impact of market volatility on your portfolio. This is because you will be selling assets every month, thereby reducing the risk of selling a significant amount of assets at a low point in the market. Volatility can significantly impact your portfolio, and it’s essential to be prepared for it. By understanding how volatility works, you can make informed decisions about your portfolio and ensure that you can survive market volatility.
If you need help deciding what investments are best for you or want someone experienced in handling volatility-prone portfolios, we’re here! Our team will get to know you and guide you on investing strategies explicitly tailored to the needs of investors during periods of volatility. In addition, our advisors will create an asset allocation strategy designed around mitigating risk while still meeting your long-term goals.