SUMMARY: Staying the course through market volatility has different implications at ages 20, 30, 40, 50, and into retirement. Check out these tips.
When you invest in the stock market, you want to see growth, but unfortunately, in most cases, investments do not grow all the time. Inevitably, the market goes up and down, and to safeguard your potential for long-term growth, you need to understand the importance of staying the course through market volatility. However, you also need to adjust your approach to investing at different ages.
Staying the course through market volatility has different implications at ages 20, 30, 40, 50, and into retirement. Check out these tips.
20s to 30s
At these ages, you should be actively saving for retirement. By investing early, you have the opportunity to amass more wealth than you do if you wait until you are older. When choosing your investments, keep your personal risk tolerance in mind, but don't necessarily sell funds that drop in value. At these ages, you don't need the funds for another 30 to 40 years, and as a result, you have the ability to ride through market volatility. Typically, at these ages, the best course of action when investments drop is to just do nothing.
40s to 50s
At these ages, retirement is looming on the horizon, and ideally, you should be investing as much as you can. Even at these ages if your investments drop in value, you shouldn't necessarily sell. But you should consult with a financial professional and make slight changes as needed.
Keep in mind that while the market grows at an average of 7.2% per year, research indicates that the average investor only sees 5.3% growth per year — analysts speculate that this discrepancy may be due to investors selling or cashing out when the market drops.
60s to 70s
At this point, you should reach out to your portfolio advisor and make sure that you are ready to make the leap to retirement. As a general course of action, your investments need to be lower risk during these decades of your life, and your cash reserves should be higher. As a general rule of thumb, you should have at least two years of cash reserves in place. This gives you the flexibility to ride out drops in the market. Typically, when the market drops, it takes about two years to correct.
Now you need an investment strategy that helps you maintain your retirement funds. To deal with market volatility and to outlast downturns in the market, you should have five to 10 years of cash reserves or liquid investments in place. Depending on your financial objectives, you may want to replace high-risk investments with stable and predictable investments such as CDs.
Best Practices for All Ages
Regardless of your age, you should keep these tips in mind during times of market volatility:
- Strengthen your portfolio with high-dividend and value stocks
- When investing during a bear market, don't rush. Ideally, you want to wait until the market bottoms out.
- Increase your cash position to help you weather volatility.
- Actively monitor financials.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
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20% every 3.5 years and 7.2% growth vs 5.3%: https://www.capitalgroup.com/individual/planning/market-fluctuations/staying-the-course.html