With a Plan, You Don’t Need to Worry About Volatility in the Market

If you pay attention to the stock market, you’ll notice some dramatic swings from time to time.

On any given day, the market may fall on a big news story, only to recover the very next day. Foreign currencies fluctuate. Oil prices are all over the map. The 2020 pandemic caught the entire world off guard. With so many factors moving the market, how do you stay anchored?

With a little perspective and a financial plan that goes beyond your portfolio.

Investments are an important part of financial planning because over time, investments can help you grow your wealth. But investments lose value from time to time and if you choose (or worse if you’re forced) to sell them at that time, you’ll lock in losses. That’s why the best financial planning includes a range of financial options that reinforce each other.

Knowing that you have an emergency cash reserve, permanent life insurance cash value (which doesn’t rise and fall with the markets) and (if you’re in retirement) steady income from an annuity means that you don’t have to worry during a down market.

When the stock market gets volatile, it’s crucial to remember the specific role investments serve in your plan. If it’s for long-term growth, there’s no reason to get wrapped up in short-term turbulence.

Why you shouldn’t fear volatility in the market

Let’s say you commute to work every single day. You’re probably going to take the fastest, most efficient route. In normal conditions, this is the path you’ll stick to, day in and day out.

Building a long-term financial plan isn’t all that different. When you’ve appropriately balanced your risk, put safeguards around what you have and maintain a clear vision of where you want to go, you’re establishing the most efficient route to your ultimate destination.

“When you build a financial plan, you’re coming up with the route you’ll take every single day to reach your end goal – maybe it’s retirement, college savings or something else,” says Brent Schutte, Northwestern Mutual Wealth Management Company Chief Investment Officer. “The most important thing is to stick to that path every single day. Long-term investing, time and again, has been shown to work.”

Here’s a quick case-in-point. If you had invested $10,000 in an index fund that tracked the S&P 500 on Oct. 9, 2007, your timing was less than ideal. That was the day the market peaked just before financial crises pushed the economy into the Great Recession. By February 2009, that investment would be worth less than $4,500. However, by November 2012 you would have broken even. And if you let it sit, remained patient and stuck to your guns, that investment would be worth more than three times as much today with dividends reinvested.

If you panicked in 2009 and decided to veer off your path and try an entirely new route to reach your destination – or changed it altogether – you would have missed out on significant growth. That’s why at Northwestern Mutual we always recommend stocks as long-term holdings. When viewed with this perspective, a traffic jam – or a volatile stock market – shouldn’t be pushing your stress levels through the roof.

“Investors shouldn’t jump into the market with the mindset that they are buying equities for anything other than the long-term,” says Schutte. “Despite all the press and time dedicated to the near-term investing prospects, long-term investing and prudent asset allocation are what drives financial success.”

When strategic financial planning shines

When the stock market gets rocky and headlines spell doom and gloom, Schutte suggests taking a step back looking at the whole plan. Every single component should, in its own way, be carrying you to your destination.

This is where the objective advice and expertise of a financial professional can really shine. Sometimes, there’s a jack-knifed semi blocking all four lanes of traffic on your route to work. Google Maps may suggest a quick detour that'll take you down along a different route for a short time, but you’ll get back onto your normal route once you’re past the trouble. Financial pros can do the same for your long-term plan by determining your weighting in equities and bonds.

Do you hold 50 percent bonds and 50 percent stocks? Is it an 80/20 split? This is a crucial decision that shapes the route you take to your end goal. As the icing on the cake, a financial pro will further refine your equity allocation to further optimize your risk balance.

“Think of that as the tilts we may make, or the slight overweights and underweights in certain sectors of the economy or parts of the world,” says Schutte. “It’s my job to get you to your end destination, hopefully a bit faster and more comfortably.”

If you’re closer to retirement, evaluating your portfolio may be more about managing risk. Are you comfortable with your exposure to riskier assets? Do you have an adequate mix of guaranteed and variable income streams to meet your needs as retirement approaches? Is it time to think about an annuity? Have you accumulated enough cash value in a permanent life insurance policy that you could use in the event of a recession? These are all questions worth discussing with a financial professional.

Above all: Don’t abandon the plan

The key point is that your decisions shouldn’t be dictated by temporary noise in the stock market, but by how each investment or asset you own helps you reach your destination safely.

When you stick to a long-term, comprehensive financial plan, even dramatic gyrations in the stock shouldn’t faze you. Sure, your stock portfolio may lose value for a time, but your emergency savings is still there. Your life insurance policy is still protecting your family and, perhaps, growing its cash value. You’ve still got the day-to-day expenses budgeted. There’s no reason to throw the plan out because the market threw a curveball.

“If you are a business owner and I say to you I think a recession is coming, do you shut down the factory completely and then wait for the uncertain event to happen? Or might you just make tweaks to possibly prepare for it?” says Schutte. “You still have costs to cover and opportunities to exploit. Just like in your portfolio, you’ll have opportunities to rebalance, collect dividends or reinvest at lower prices.”

When you've built a long-term plan and are resolved to stick with it, the stock market’s ups and downs shouldn’t cost you a good night’s sleep.

“Through Great Depressions, Great Recessions, wars and other risks – the tenets of long-term investing have held up. We expect the coming years to prove no different,” says Schutte.

No investment strategy can guarantee a profit or protect against loss. All investments carry some level of risk including the potential loss of principal invested. The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement income will reduce the death benefit and may affect other aspects of the policy.