Don’t let market headlines hinder happiness

It’s been said that volatility is a “tax” that investors have to pay for harnessing the wealth-building power of the financial markets.

But rationalizing market fluctuations doesn’t make them any less nerve-wracking, especially if you’re nearing retirement age.

Some investors react to volatility like they’re living in the path of a hurricane. They board up the windows, gather the essentials, stay put and hope the storm passes without hitting too hard.

Others may get nervous and want to sell some investments and move the proceeds to cash.

The truth is, if you have prepared appropriately for market volatility, then normal market fluctuations shouldn’t be a concern and you can continue living your life and spending your money as you usually do.

Now, not everyone has “prepared appropriately.” Here’s a three-point checklist that may help to keep your finances on track regardless of what the financial markets throw at us.

1. You have a wealth plan that covers all your bases.

No wealth plan is totally immune to market fluctuations. But by diversifying your investments across stocks, bonds and other financial vehicles, it can alleviate the exposure that a single market event is going to jeopardize your long-term security.

It also is helpful to have both long and short-term savings “buckets” that can be used depending on your age, goals and how close to retirement you are.

This combination of diversified assets and a healthy savings can provide stability. It can also provide flexibility to address potential problems or to take advantage of opportunities that might benefit your overall portfolio.

Where you have the most direct control over your finances is your personal spending. If you’re retired, it’s always important that you spend within the boundaries of your annual withdrawal plan.

Younger investors might consider increasing their planned savings contributions before a possible downturn, especially if you’re counting on that money for a home or auto purchase in the near future.

In short, sticking to your plan and living within your means are two of the best financial moves anyone can make during market volatility.

2. You understand your relationship with money.

A big focus of wealth planning exercises is to make people more aware of what their relationship to money is really like.

For example, early on in the process interactive tools and discussions are used to identify the comfort levels of a client and how investing in the markets can impact that comfort in different scenarios.

Comfort is the priority when building a wealth plan. Return is relevant but is not pursued at the expense of comfort.

Identifying these issues upfront lessens the likelihood of a surprise later.

It is important to have each spouse provide independent responses to questions of comfort and goal expectations. Unfortunately fear and greed are the primary emotions that drive financial decisions at the extremes.

Building a plan proactively when these emotions are not present will help create an objective discipline for your plan.

Market volatility can trigger some emotional decisions at both ends of the scale. During extreme down markets, “worrisome” investors may feel the need to over-allocate to cash, bonds, CDs and other low-yield options that cripple their long-term wealth-building.

Overly “optimistic” investors might see “buy low” signs everywhere they look and get in over their heads.

Creating a plan ahead of time allows clients to weather the storm knowing they have prepared for it. The goal is not to make changes during the storm, but to build a ship that can withstand the volatility along the way that is within an acceptable comfort zone.

It doesn’t mean you have to be happy about the volatility, but having the comfort realizing it is an expected inevitable event that has been prepared for.

3. Your focus is long-term, not short-term.

It’s true that some current market indicators are flashing warning signs. Short-term interest rates are hovering near the same level as longer-term interest rates, and that sometimes is a cause for concern about the direction of the economy over the next 12 to 24 months.

Major stock market averages have experienced daily drops that, while not unusual, still grab your attention. And global trade disputes and political turmoil continue to unsettle investors.

Investors who try to time their investments to these or any other economic signals are looking at market history through a dangerously narrow lens.

The ultimate size of your nest egg won’t be determined by one week, one month or even one year. True wealth is built up slowly, over decades of steadfast saving and investing, careful planning, and thoughtful rebalancing when necessary.

Today’s losses might be tomorrow’s gains, or vice-versa.

So don’t let any short-term market worries affect your day-to-day enjoyment of life — keep your long-term perspective.

This article is provided by Pete Alepra, a financial adviser at RBC Wealth Management in Cedar Rapids; [email protected]. The opinions in this article are for general information only and are not intended to provide specific advice or recommendations for any individual.

RBC Wealth Management is a division of RBC Capital Markets, a member NYSE, FINRA and SIPC. RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in consultation with your independent tax or legal adviser.