How Should People React to the Current Market Volatility?

Anyone who has paid attention to the markets recently has likely seen them in free-fall. The markets in the United States entered a bear market today for the first time in years. Largely, this is a response to the uncertainty surrounding the coronavirus. This virus has caused sports leagues across the country to suspend (including the NBA), has halted political rallies, and sent countries into quarantine. As a result, this has caused businesses to suspend many of their operations which is going to impact their profits. This has driven the markets down. Consequently, many people are wondering what they should do with their finances during this turbulent.

The answer is that it depends. For those who have money invested in the market in the form of stocks, bonds, and mutual funds, they are likely worried about all the red arrows they are seeing. For those who have money invested for long-term purposes, such as retirement thirty years down the road, they shouldn’t worry too much. The market cycles back and forth. What goes down will come up again. Once the coronavirus fears are under control, people should expect the markets to rise again. This will reverse the losses that have taken place over the last couple of weeks.

On the other hand, those who are going to need their investments sooner rather than later should be thinking about what they can do to mitigate their losses. Stocks are the most volatile investments on the market. They tend to take drastic swings back and forth. For those who need the money today, they should think about taking their money out of the market entirely in an effort to halt their losses. Anyone who is going to need their money a few years from now should think about moving their money from stocks to bonds. A good rule of thumb is that someone’s percentage of bonds in their portfolio should match their age. Bonds are far less volatile than stocks. Therefore, they will not drop as much when the market starts to fall.

Younger people who are going to need their investments to purchase a car or a house in the near future should be taking similar actions. In addition to bonds, there are other forms of investments such as certificates of deposit (CDs) and money market accounts that take on less risk. These are great ways to still generate some return on capital without taking on the same risk as individual stocks or mutual funds.

Even though the coronavirus has caused the markets to drop, people need to take a deep breath. Then, assess the options. Those who aren’t going to need their money for decades should know that history says the market will come back up.