Market volatility is nothing new, but that doesn’t make coping easier. In fact, the current financial headlines can trigger stress, especially when retirement plans are at stake. 

An emotional response may not dictate the answer if you’re wondering how to respond when markets get bumpy. It pays to stay disciplined and think long-term. It pays to remember that your most significant financial risk is a failure to pursue your financial goals.

At Sherr Financial Associates (SFA), our team of Boston financial planners works with affluent individuals and families who want a steady approach and not one reacting to the latest media-inspired headline. That starts by developing a financial planning strategy built around discipline, risk tolerance, time horizon, and a diversified strategy designed to reduce your risk of large losses.

Why Market Volatility Feels Worse Than It Is

Volatility often inspires media headlines that promote uncertainty and emotion. When markets drop, even temporarily, these headlines can trigger the wrong responses. Looking at your portfolio multiple times a day or week is the wrong emotional reaction. Your best response is to stay focused on your long-term financial goals (e.g., retire in 2045). 

Here are some truths worth remembering: 

• Volatility is normal. Markets fluctuate regularly.
• Volatility is triggered by economic events (domestic and global).
  
• Long-term investors will experience several downturns throughout their investment lives.
  
• Reacting emotionally can lead to poor decisions that lock in losses or negatively impact pursuing financial goals.
• Your best reaction could be to view down markets as buying opportunities when certain stocks are cheaper.
• Invest in quality companies.

   

At SFA, we can help you sort through the daily noise and stay focused on the bigger picture. Your investment strategy should be based on potential volatility, so you don’t overreact when the markets fluctuate in value.

What Makes a Portfolio Resilient to Market Volatility?

There are no silver bullets that can shield your account from short-term fluctuations in the prices of company stocks. However, there are ways to build an investment strategy to absorb volatility without excess emotional stress. One of the most important strategies you can deploy for your financial future is diversification. You do not want your investments responding the same way to a range of economic events.

Diversification in an investment portfolio means spreading your money across a mix of asset classes, like stocks, bonds, real estate, cash equivalents, domestic, and foreign so that no single investment or asset class has too much impact on your overall results. The idea is simple: “Don’t put all your eggs in one basket.”

Different asset classes (and even sectors of the economy and regions of the world) often react differently to the same market events. For example, bonds may hold steady or rise when stocks decline, helping cushion the impact on your combined returns. 

Your risk increases exponentially if all your investments move in the same direction, based on the same economic events.

Here’s why diversification matters during periods of market volatility:

• Reduces exposure to any investment: If a particular stock or sector takes a hit, it only impacts part of your assets.

   

• Provides more stable returns over time: While one part of your portfolio may lag, another might perform better than expected, helping smooth out your overall performance.

   

• Improves your ability to stick with your plan: Watching your entire portfolio drop in lockstep is more likely to lead to emotional decision-making. Diversification can reduce that stress and help you stay focused on the long term.

   

Diversification is not a guarantee against losses, but it’s one of the most reliable strategies for managing risk during volatile markets.

Calculating Time Horizon and Risk Tolerance: A Crucial Pairing

Not everyone reacts to market volatility the same way, and that’s okay. Risk tolerances should vary based on when the assets will be needed to produce income, for example, your intended retirement date. That could be five years from now or twenty-five years. The longer the timeline, the higher your risk tolerance should be. 

Calculating your time horizon and risk tolerance is key to building an investment strategy that fits your goals, lifestyle, and comfort level with the potential for uncertainties.

Time Horizon: How Long Until You Need the Assets? Or, more realistically, income from the assets?

The time horizon refers to the time you expect to hold an investment before needing the assets (e.g., building a second home) or income (e.g., supplementing retirement income). It influences how much risk exposure you can reasonably handle.

• Short-Term (0–3 years): You’ll need the money soon. Stability matters more than growth. Think CDs or short-term Treasury bonds.

   

• Medium-Term (3–10 years): You have some flexibility. A balanced approach between growth and income may make the most sense.

   

• Long-Term (10+ years): You can afford more risk in exchange for higher potential returns. Stocks and other assets that have appreciation potential may be more appropriate.

   

The longer your time horizon, the more you have to recover from periods of market volatility.

Risk Tolerance: How Much Volatility Can You Handle?

Risk tolerance measures how comfortable you are with financial volatility that triggers emotional responses. It’s often broken into three categories:

• Conservative (Seniors): Prefer stability. You’d rather accept lower returns than be exposed to the potential for significant volatility (100% short/intermediate bonds and T-Bills).

   

• Moderate (Middle-Aged): Comfortable with some ups and downs for a chance to generate improved returns (60% stocks and 40% bonds) at moderate growth.

   

• Aggressive (Younger): Willing to tolerate market swings for the potential of higher long-term returns (100% stocks, real estate, and alternative investments).

   

To assess risk tolerance, consider:

• How did you react during previous market downturns?
• Would you stay invested if your portfolio dropped 20% in one month?
• You understand the difference between your willingness to take risks and your capacity to sustain potential losses.
  
• Do you have substantial financial obligations (mortgage, tuition, etc.) that could impact your ability to sustain extended down periods?

Our Boston-based financial advisors use a questionnaire or risk profiling software to quantify tolerance (subjective) and capacity (objective), but self-awareness also plays a significant role. 

Should I Move to Cash Until the Market Calms Down?

It’s a common question, and the logic feels safe, but moving your investments into cash can often lead to missing recovery periods. Since none of us has a crystal ball that can predict market tops and bottoms, trying to “time the market” is more based on luck, especially since markets typically don’t send an “all clear” when they start to rebound. 

It is also important to note that the markets frequently move in short spurts, 1,000 points in a day or week, and you may have already missed significant gains when you feel comfortable about the market’s most recent direction. Instead, we recommend:

• Rebalancing rather than exiting
• Keeping a cash reserve for near-term spending, but not for long-term goals
• Using a second reserve to buy when prices are lower
• Reviewing whether your portfolio still matches your comfort level

What If I’m Retired or About to Retire?

One of the most significant and often overlooked risks for people nearing or already in retirement isn’t market volatility. It’s not being invested at all. If you put too much money in cash or short-term bonds out of fear, you might feel safer in the short-term, but you could run out of money later in life because your principal did not keep pace with inflation.

Here’s why staying invested matters:

1. Inflation Erodes Purchasing Power: Cash may feel safe, but it doesn’t appreciate fast enough to keep pace with inflation.

Example:

You have $500,000 in a savings account earning 2%. If inflation is 4%, your money loses 2% of its value annually. That $500,000 will buy far less in 10 or 20 years.

2. Longer Retirement = More Growth Needed: You could easily live 25–30 years or more in retirement. A lot can happen in that period, so thinking long-term is critical.

Example:

As a 65-year-old retiree, you opt to shift your investments into short-term bonds or CDs, which might avoid market dips, but also miss out on the long-term compounding of higher stock returns. A diversified portfolio with even a modest allocation to equities can help extend the life of a retirement portfolio.

3. Missed Market Rebounds: Retirees who move to cash during a downturn and wait too long to reinvest risk missing the market’s recovery, when gains are the biggest.

Example:

Someone who pulled out of the market in March 2020 when COVID hit and stayed in cash would have missed the dramatic rebound that followed. Missing just a few of the best days in the market can drastically reduce long-term returns.

4. Growth Is Still Necessary, Just Make It Balanced: Investing doesn’t mean being reckless. It means finding a balance that allows your money to grow while managing a risk level you are comfortable with.

Example:

You could keep 40%–60% of your portfolio in a diversified mix of equities and use bonds and cash for near-term income needs. This “bucket strategy” helps preserve your capital while allowing part of your portfolio to grow.

At SFA, we provide personalized investment management and financial planning for Boston individuals and families who want to move forward with clarity, not guesswork. Whether planning for retirement, managing inherited wealth, or just getting started, our team helps you get and stay focused, even when media-driven headlines are concerning.

If you’re ready to discuss your portfolio in more detail, connect with our team of Boston financial planners today.

These are hypothetical examples and for illustrative purposes only. No specific investments were used in these examples. Actual results will vary. Past performance does not guarantee future results.

Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.