Investing in volatile markets: Smart strategies for confident investing

Markets can be unpredictable, with ups and downs that can make even the most seasoned investors uneasy. But the good news? You don’t have to let market swings derail your financial future. Rather than reacting to every dip or surge, understanding that market fluctuations are part of the process allows you to stay steady and make informed choices. Whether you're saving for retirement, growing wealth or protecting what you've built, embracing a long-term mindset can help you navigate uncertainty with confidence.

Let’s explore ways to help you stay on course and make smart financial decisions—no matter what the market does next.

Volatility in the markets can be defined by pronounced swings up and down in the prices of investment securities like stocks and bonds. A volatile market can be brought on by negative economic activity, such as inflation and rising unemployment, or by unforeseen events, such as a global pandemic or war.

For example, following the onset of the COVID-19 pandemic, the stock market plunged more than 30% from February 12 to March 16, 2020. More recently, as inflation was hitting 40-year highs and the Russia-Ukraine war was raging in 2022, the stock market fell by more than 25% from the beginning of the year through the end of September.

Keep in mind that large crashes can be followed by large recoveries, and historical data supports that claim. Between the bottom of the COVID-19 crash in March 2020 and the subsequent January 2022 peak, the stock market climbed more than 100%. Following the 2022 market decline, the stock market advanced 26% in 2023, marking the biggest stock rally since 2019.

These swings came as a surprise to many and can be the cause of a great deal of financial anxiety. However, expect that the market naturally will have peaks and valleys in the future. By accepting volatility as a market inevitability, you can shepherd your resources and expectations with care and work to create financial security for yourself and your loved ones.

Market dips are nearly impossible to predict, which means that you always should attempt to invest in a way that aligns with your investment goals and risk tolerance. For instance, if you have a few decades of investing ahead of you to achieve a long-term goal such as retirement, you could maintain an asset allocation that leans more toward stocks than bonds.

If you are retired, you may want to remain more conservatively invested. It may fit your interests to invest for your short-term income needs in stable assets, such as cash, fixed income and shares of established companies with a track record for paying dividends. Understanding volatility can help give you the confidence to navigate future swings in the market.

When stock prices fall by 20% or more from a recent peak, it's known as a bear market. Historically, the average bear market lasts about nine and half months. A bear market for stocks ends when prices have appreciated by 20% or more from the bottom.

If you are wondering if it's smart to move your 401(k) or IRA out of the stock market while it's crashing, the short answer is no.

It's impossible to know in advance exactly when stock prices will resume their climb back upward. Furthermore, the largest gains in the market often occur after the largest declines, so time in the market often beats timing the market.

If you need cash during a down market, it's wise to have an emergency fund, which Thrivent recommends should range in size between three and six months of your living expenses. This way, you won't need to sell stocks while prices are down to meet short-term cash needs.

While you can't control stock market volatility, you can control how your investment portfolios are managed. There are a number of timeless tips and strategies for investing in volatile markets. Here are seven ways to deal with a volatile stock market:

It's normal to feel nervous when markets drop, but it's important to try to keep your emotions in check. Withdrawing money while the market is down is essentially locking in the losses before there is time for the market to rebound. By staying the course, you may end up making gains when the markets recover.

Before 2022, the S&P 500 Index had experienced 13 bear markets since the end of World War II, with each one fully recovering in an average of 26 months. On average, the index not only rebounded but surpassed its previous peak by 68%. True to this historical pattern, the market reached an all-time high in January 2024—and continued to climb by setting a new all-time high December 2024.

Planning in advance and selecting a combination of investments that align with your investing goals and tolerance for risk is a smart way to invest during a volatile stock market. Understanding your risk tolerance is an essential step for protecting against market volatility over time.

Your risk tolerance may change over time as your life changes so be sure that you don't set and forget it. "It can be because you're becoming more comfortable in your investment strategy," says Sarah Auernhammer, a wealth advisor at Thrivent. "It may change because you may need more money in the short term because you're going to be retiring soon. Your risk temperament is based on what's going on in the world and what stage you are in using those monies."

One of the best ways to understand your ideal risk tolerance is to work with a qualified financial advisor who can help you tailor your investments to align with your goals, timeline and comfort level.

The market is unpredictable, and the best investment in any asset class can change often. That's why you can't count on any one of them to be the best year after year. Diversification is one of the smartest ways to reduce volatility in a portfolio and could be a key to investing success over time. Essentially, it's the concept that you shouldn't put all your investment eggs in one basket. To diversify your assets, make sure you have a variety of investments across a range of asset classes—like stocks, fixed income and real estate—with varying levels of risk in your portfolio.

If you're tempted to time the market, consider trying dollar-cost averaging instead. It's a strategy to help buffer against volatility by investing equal amounts at regular intervals, whether the market is up or down. It's about investing over time, not timing the market. You are likely already using dollar cost averaging if you are contributing regularly to a retirement plan at work or an individual plan if you are self-employed.

The bucket system for investing is a strategic approach that involves dividing an investment portfolio into distinct "buckets" based on different time horizons and risk tolerances. Each bucket is designated for a specific purpose, addressing various financial needs.

• The short-term bucket typically holds cash or conservative investments to cover immediate expenses and emergencies, providing liquidity and stability.
• The mid-term bucket may include a mix of bonds and moderate-risk investments, serving as a source for upcoming expenditures or anticipated financial goals.
• The long-term bucket is geared toward growth, containing a diversified portfolio of equities with the aim of capital appreciation over an extended period.

While investing money for long-term goals is important, saving is a vital part of any financial plan. Methodically building up a savings cushion over time can help you cover unplanned expenses. Prioritize setting up an emergency savings account if you haven't already. What's more, emergency savings can help you stay calm during fluctuating markets if you can tap into savings rather than your investments.

Does your current portfolio look the same as when you created it? Or is the mix of stocks, bonds and cash a little out of whack? Rebalancing is a systematic way to take the emotions out of investing decisions and restore the mix of investments in your portfolio to their original target allocations. Rebalancing helps to keep your portfolio in line with your investment objectives and risk tolerance so that you'll have the best chance for success. It's a good idea to rebalance annually with the help of a financial advisor.

Market volatility can be hard to predict and difficult to navigate. During these times, having the guidance and support of a qualified professional can make a significant difference. Consider contacting a local financial advisor to not only set long-term financial goals but create back-up plans for periods of economic growth and strain. A financial advisor can answer your unique questions and offer personalized advice.