If you’ve been feeling unsettled about the market lately, you’re not alone. Seeing your portfolio fluctuate can naturally spark anxiety, especially when you’re focused on planning for a stable retirement. However, before headlines shake your confidence, it’s helpful to understand what’s behind these ups and downs and how to respond in a way that supports your long-term goals.
By understanding what drives market movements, why they matter, and how to respond thoughtfully, you can turn swings into opportunities rather than setbacks. Together, we’ll explore the key aspects of market volatility and how you can approach it with a clear, rational mindset.
What is Market Volatility?
Market volatility refers to the financial markets’ reaction to changes, often through rapid and significant price movements. Investor sentiment related to these price movements can be measured using tools such as the Volatility Index, also known as the VIX. It is often referred to as the “Fear Index” because it reflects market expectations for future volatility, commonly highlighting periods of uncertainty or risk.
It’s important to note that volatility works both ways. Prices can swing upward just as dramatically as they can decline. However, many investors tend to focus on downward volatility because losing money often triggers a stronger emotional reaction than gaining it. While headlines may latch onto the “Fear Index” to generate buzz, it’s fundamental to remember that volatility isn’t inherently negative. It’s simply the market responding to new information, and these fluctuations are a normal part of investing.
The Four Horsemen of Market Uncertainty
Right now, the market is trying to digest a lot at once. Economic signals are mixed, creating a sense of unease that is manifesting in the daily market swings. Four key drivers have been making headlines:
1. Tariffs
Government-imposed taxes on imported and exported goods disrupt trade patterns. While designed to regulate trade balances, tariffs often result in increased costs for consumers as companies pass the burden along. These trade policies can influence inflation and consumer behavior, causing ripple effects across the economy.
2. Inflation
Although recent inflation rates have cooled from their peak, they remain elevated compared to historical norms. Sticky inflation impacts everything from grocery store prices to housing costs, creating uncertainty for both businesses and households. The Federal Reserve continues to balance this issue through monetary policy, which also adds to the uncertainty.
3. Tech Sector Wobbles
Technology stocks play a significant role in driving the market. Because tech companies comprise a significant portion of major indices, their performance can skew overall market trends. Their recent struggles highlight the need for portfolio diversification.
4. Government Spending
Budget cuts and reduced government spending introduce another layer of unpredictability. These shifts can trickle down to local economies, affecting employment rates, consumer spending, and even housing markets.
Lessons from History: Volatility is the Cost of Admission
Economic history is full of examples of market volatility. From the dot-com bubble to the 2008 financial crash to the COVID-19 pandemic, past downturns have been sharp and unnerving. Yet, each time, markets have eventually rebounded. Consider this perspective: market volatility is the price investors pay for long-term growth. Without these swings, there wouldn’t be opportunities for higher rewards. Major events remind us that, while uncertainty is uncomfortable, staying invested has historically been the most effective strategy for weathering market storms.
Why Timing the Market Rarely Works
It can be tempting to think, “Maybe I should just get out for now and come back when things settle down.” But trying to time the market usually backfires. Not only do you have to guess when to get out, you also have to guess exactly when to get back in—and those guesses often miss the best recovery days. It’s a bit like trying to jump off a moving train and then leap back on at the perfect moment. Sounds exhausting, right? That’s because it is—and it’s rarely effective.
For instance, if you missed just the 10 best market days in the past 20 years, your overall returns could be cut in half. Missing the top-performing days while trying to avoid losses can devastate what might have been long-term growth.
Additionally, attempting to predict market movements amplifies emotional decision-making, often leading to more harm than good. Instead, focus on staying the course to give your investments the time they need to grow.
A Better Way to Respond
While market volatility itself is beyond your control, there are several factors within your grasp. Instead of reacting to market noise, focus on what you can control:
- How your portfolio is structured. A diversified portfolio helps smooth out some of the bumps along the way. In addition, focusing on tax efficiency helps to optimize returns.
- Your timeline. Your plan should be aligned with when you actually need your money, not with the current market movements.
- Your emotional response. This might be the hardest part, but keeping calm during market dips can make a big difference in long-term success. Avoid reactionary decisions and trust the long-term plan.
If you’re not sure your current approach is still a good fit, that’s okay. This might be a good time to revisit your retirement income strategy and make sure it still reflects your comfort level and your goals. One tool to help align your strategy with your personality is the Retirement Income Style Awareness® (RISA®) framework. This approach helps you build a plan that aligns with how they naturally think about retirement income, making it easier to stick to your goals during volatile times. That way, when the market feels shaky, your plan still feels solid because it’s built around you, not short-term market trends.
What Next?
If the recent headlines have left you feeling uneasy, we’re here to help you make sense of it. Our latest webinar breaks down what’s driving current volatility and what you can do to stay on track.
Second-guessing your financial plan? Take our free RISA® assessment and discover a retirement strategy that aligns with your natural preferences, allowing you to create a plan you can stick with.
Want to learn more? Listen to Ep. 172 of the Retire With Style Podcast.
