Keep calm and market on

January 03, 2024

Even the most seasoned investors can sometimes seem to forget that markets move in both directions: up and down. Volatility can spark irrational, fear-driven behaviors that can cause people to pull their investments out, often at a low point, instead of waiting it out for a chance to recoup their losses.

It’s important to keep in mind that retirement savings plans are long-term investment vehicles, meant to weather the markets’ ups and downs over decades. While volatility in the immediate present can cause stress, markets tend to even out over the extended time horizons of most retirement investors.

Even so, most financial professionals have a good idea who’s on the line when markets drop and the phone starts ringing. Along with the financial guidance they’re focused on, they may benefit from a healthy dose of perspective. During turbulent times, managing worries and emotions can be as much a part of the job as managing money.

Plan sponsors can find themselves in a similar position with employees, so it’s important to be prepared to address plan participants’ fears. A double-shot of straight talk and an even-keeled example can help participants avoid over-reactions that can derail their long-term goals — and plan performance.

The next time you sit down with someone who’s stressed-out about investing, consider including the following topics in your conversation.

Establish a firm foundation

When addressing fears about the future and whether market volatility will impact someone’s retirement, it’s easy to look to other issues that could potentially help them close the gap, like keeping spending in check or climbing out of debt. It certainly is important to talk about those issues, but the first step is to help investors focus on their long-range goals instead of the perceived crisis in front of them. It might be helpful to revisit an individual’s retirement plan to ensure it still reflects their personal values and financial goals, and to provide insights into whether current volatility might impact it and to what degree.

Just like other areas of life, markets will have ups and downs along the lifelong journey of planning for retirement. Developing a plan for navigating those twists and turns can provide a healthy way to mitigate the risk of overreacting and making poor financial decisions in the “heat” of the moment. 

Once a foundation is established, you can help a client or employee parse through the following practical steps to address potential shortfalls.

Encourage debt management

For all the emphasis placed on strategic placement of assets, maxing out contributions and accruing earnings on investments, there’s often a lack of emphasis on keeping spending in check in the first place. It’s easy for investors to get stressed over a couple percentage points dip in the market, yet many don’t bat an eye at dishing out 20% or higher interest rates for credit card debt.1 With nearly half (48%) of all credit card holders carrying a balance from one month to the next, some of your clients are likely among them.2 

Granted, credit card balances typically won’t rival the amounts held in retirement accounts, but paying exorbitant monthly interest rates on even a small balance can add up to significant losses over time and negate potential gains elsewhere. The reality is, consumer loans for everything from credit cards to cars to homes are at all-time highs,3 and with rising interest rates in nearly every sector, that could spell trouble. Imagine directing payments that would normally go toward paying down debt toward an investment with earnings potential instead? 

Financial professionals need to be willing to ask the hard questions and have the difficult conversations if they want to help clients get ahead and reach their retirement goals. Strategies like back-to-the-basics budgeting, consolidating debt, affordable housing and living within their means might be in order.

Expand the definition of “diversification”

Financial professionals are well aware of the importance of a diversified investment portfolio, including a reasonable blend of stocks and bonds. Those strategies remain, but some investment vehicles that might have been dismissed in the past could be viable options as a result of recent rate hikes by the Federal Reserve.

If you were sitting across from a client a couple years ago, could you have imagined suggesting the idea that certificates of deposit (CDs) might play a role in a diversified portfolio? Not likely. While most might consider rising interest rates an unfavorable scenario, they’ve helped to raise many CD rates to levels not seen in years.4 While they might not play a major role in an investor’s retirement savings, the guaranteed income may be especially appealing for risk-averse clients.

Similarly, investors may want to keep an eye on bonds to see whether they inch closer toward the almost unheard-of rates reached in 2022, including Series I savings bonds that delivered a 9.62% guaranteed return.5 It’s important to consider how diversification may look different in today’s economy than it did a short time ago.

Acknowledge the past, present and future

Seasoned financial professionals and plan sponsors know that market volatility isn’t anything new; it’s the norm. Those who’ve helped clients through previous market swings and recessions may have a healthier perspective on what awaits on the other side.

Reviewing a client’s risk tolerance, time horizon and asset allocations can play a role in helping to relieve their stress. But volatility doesn’t just impact a client’s portfolio, it can also impact their emotions and impede rational decision making. For some, those emotions can have a paralyzing effect, leading them to do nothing despite signs to shift their strategy. For others, stress evokes a flight response, leading to selling low or buying high. 

Part of a financial professional’s job is to determine how each of their clients might respond to volatility and tailoring their approach to help meet their needs. It’s important to acknowledge the realities of current volatility without giving into doomsday scenarios. Instead, keep a level head and focus on an individual’s core values and long-term goals. 

1 Board of Governors of the Federal Reserve System. Consumer Credit – G.19. 2023, 7 August
2 Board of Governors of the Federal Reserve System. Report on the Economic Well-Being of U.S. Households in 2022. 2023, May
3 FRED. Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks. 2023, 18 August
4 Federal Deposit Insurance Corporation. National Rates and Rate Caps. 2023, 17 July
5 U.S. Department of the Treasury, Treasury Direct. Fiscal Service Announces New Savings Bonds Rates, Series I to Earn 9.62%, Series EE to Earn .10%. 2022, 2 May