As I write this, the S&P 500 (an index/benchmark/comparison) is riding the ups and downs but year to date mainly downs. How are you supposed ride these ups and downs while knowing you can still achieve the lifestyle you want to. Historically 80% of the time the market is down and 20% of the time the market is up. We are living in the times where 20% feels like 80%. Below, we are going to breakdown market fluctuation into four key pieces to help you not react in a way that does not serve your long term financial plan.
1. Understand the expected: Defining ‘market volatility’ and the current state
Volatility itself is a word used to describe drastic fluctuations and the unpredictable nature of an entity. The element of goes up comes down and back again. The only piece of life that we can count on is change. In the industry we measure volatility in the market using the VIX index which tells us how much the market is expected to fluctuate. We live in a timing of evolving and changing markets. We will need to grow to expect volatility going forward in planning. Financial planning at the core brings where you are currently, where you want to go and the life you desire to experience by testing your savings, investments, and earnings against different types of market volatility. If you only focus on market performance and not the destination of your plan then you will get stuck on the roller coaster ride.
2. Influences on fluctuation right now: What causes market volatility to happen?
At some point in the history of the market it has been one of the following. The truth be told all of the below are effecting the markets going up and down in our current space.
- Federal reserve rate increases: attempts to combat inflation the Federal Reserve raises rates in hopes to slow down spending. However, as a cultural we have a large part of our population that has always been able to purchase whatever they want, whenever they want, with credit, and no real care as to accumulation of debt. Raising interest rates will impact business lending, line of credit that some businesses are dependent on in cyclical nature to make payroll. In this example of the affordability of lines of credit, this may mean we will continue to see companies that are leveraged make layoffs in order to make their payments to creditors.
- Inflation surges: this is evident across sectors—labor costs, gas prices, energy, rent/housing market. Inflation is the rise in costs of the goods we purchase – food, cars, housing, travel, gas, etc. We can see this everywhere now. The price of a loaf of bread wad $0.75 and now is roughly $1.76. The difference in these prices is inflation. It occurs when the cost of the supplies needed, production, staffing, and distribution increase causing the cost of the products or services themselves to increase. Core inflation rose 6.6% from a year ago, the highest rate since 1982. The nagging pressure on core inflation will likely put pressure on the Federal Reserve (Fed) to stay aggressive.
- Post-covid global ramifications: supply chain is a term that we have heard more about in the last two years than some of us would like. We put bandaids on this in 2020 and 2021 yet we are still seeing the global effects of not getting the things we need at the time in which we need it – thus increasing and causing the point we just discussed, inflation. When in 2020 and 2021 we gave stimulus to drive and support our country in times of uncertainty – some needed it and others did not. We pushed money into the economy and for those that didn’t need it they were able to buy or invest in what they wanted.
- Policy changes/disruption in leading nations: We can see that division in the US government can make it hard to get policy changes solidified within our country and with our global partners. We are also impacted by decisions that are made with policy of our major economic and import partners, enter China. The economy in China, the ability for them to maintain and control the impacts COVID-19 is still having in their economy and especially manufacturing has impacted supply chain which has directly impacted inflation.
- Geopolitics/Wars: We live in a global economy. We will be effected and impacted by the events of other countries around the world. We have recently seen that with the war in Ukraine-Russia resulting in immense impact on a global scale not only from a humanitarian effort but also to our economies. Gas prices, food, agriculture, etc have all seen an increase in costs or availability.
3. Individual impact of market volatility and your long term strategy
Here are questions to consider asking yourself when thinking about the impacts of market volatility on your financial plan:
- What do I have time for?
- What milestone am I working toward?
- What will bring me joy and add value?
- What am I willing to sacrifice to achieve my goals?
4. What you CAN do amidst a concerning market
Know that this is a moment in time. The markets historically fluctuate. Remember, I started this blog entry stating the fact that 80 percent of the time the market is up, and 20 percent of the time the market is down. That hasn’t changed in just a few short paragraphs. Do not let the 20 percent make you deter from your plan. Don’t have a plan? Now is the time to make one.
Date your money: Understand what it takes to for you to cashflow a lifestyle you enjoy. Is your income able to withstand that? Do you need to increase income? Do you have excess income? What is the best direction for you to go? You won’t know unless you spend time with it.
Allow others in your community in on the goals you’re working toward. Enter what we refer to often as your ‘personal board of directors’. Lean into your team to revisit your road map for making your vision a reality. Allow them to help guide you through sensible strategy changes that aren’t led by emotions.
We aren’t your traditional advisor team. It’s time for you to align with a team of modern financial planners that will truly put you at the center of your plan. Feel free to schedule an appointment to our complimentary 30 min Wealth Assessment session to learn more about how we incorporate these strategies and others to assist you through the financial planning process.
Securities offered through LPL Financial, a member of FINRA/SIPC. Advisory services offered through Forethought Planning, a SEC registered investment advisor. The views expressed here are those of the participants, and not those of Forethought Planning or LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. LPL Financial and Forethought Planning do not offer legal services. Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.