The stock market's wild up and down moves, called volatility, give investors the willies — especially with retirement planning.
Like a roller coaster ride, volatility takes investors on euphoric upward climbs and steep scary drops. Case in point: the S&P 500's 19% decline during Wall Street's early April tariff-induced panic attack and the subsequent 18% rebound through May 13.
Yet, it's the free fall part that investors focus on most. Volatility is code word for a down market, risk and investment losses. So, is there a way to shield your retirement portfolio from volatility to weather any financial storm?
Controlling Volatility With Retirement
You could take the scaredy-cat approach and keep all your 401(k) money in cash. "(Money markets) don't fluctuate in value" when stocks are gyrating, said Clark Bellin, chief investment officer at Bellwether Wealth. You earn the prevailing interest rate. Top yielding money markets today pay 4.3%, according to Bankrate.com. But that's it.
There's a downside to playing it safe, Bellin says. The risk? You won't be able to generate large enough returns to meet your retirement goals.
"There's not a way to 'volatility-proof' your portfolio without diminishing your expected returns," said Jonathan Lee, senior portfolio manager at U.S. Bank Private Wealth Management. "Everyone would love to not take any risk and have double-digit returns, but that's just not how markets work."
The good news? You can construct a financial portfolio that allows you to sleep at night, pay the bills and achieve your long-term financial goals no matter how wild the ride.
Understand Volatility
"Volatility is a part of investing," said Rob Williams, managing director of wealth management at Charles Schwab. "The opportunity for an investor is to find ways to manage it, to anticipate it, to understand that it is part of the investing process and decide how they're going to react to it — or not (react to it)."
The key is to know what type of investor you are, how much risk you can stomach and what your short and long-term financial needs are. The next step is to build a portfolio that provides adequate cash when you need it and growth for the future.
Williams says the recent bout of volatility has a bright side. It exposes potential holes in a financial plan. The swings highlight errors that can crack a nest egg, especially for those who panicked and sold stocks at the bottom and missed the rebound.
The fact the market has roared back makes now a good time to reassess. You don't want to make major portfolio changes in down markets, says Williams.
"Volatility is often something that attracts our attention," said Williams. "It's a reminder that maybe we need to go back and look at our portfolio to make sure it's positioned properly. How did we feel in early April when this was occurring? Are there changes that I could make?"
So, how do you deliver enough shock absorbers in your portfolio to smooth things out when downside volatility strikes?
A winning game plan often means getting back to investment basics, says Kathy Carey, director of research for Baird's Private Wealth Management.
Diversify To Smooth Out Retirement Returns
Having all your eggs in one basket, such as owning only U.S. stocks or concentrating your portfolio on a sizzling tech stock or just the Magnificent Seven, will result in higher highs and lower lows.
"You want to have a diversified portfolio," said Carey. "That's been harder for people to really understand over the last several years, with the U.S. markets doing so well."
Diversification sounds like a cliche. But it's not.
Investors who fell for recency bias — the psychological tendency to assume what's working now or in the recent past will persist — may have fully invested in U.S. stocks at the start of 2025. Many skipped foreign stocks. That proved costly, as international stocks have outperformed domestic equities this year.
"Being diversified means that you will have some things that are not down as much as the worst things in the market," said Carey. Diversification means owning foreign stocks and bonds, as well as different types of U.S. stocks, such as value stocks or dividend payers.
Similarly, having some money in cash and bonds that offer ballast, also helps to soften the blow when the S&P 500 goes into free fall.
Anchor To Your Long-Term Retirement Goals
Control how you think about the market. What happens on Wall Street today, last week or last month most likely won't have a major impact on your long-term plan. "Think about what your goals are and what your investing time frame is," said Williams. "That can take out some of that emotion and feeling like you have to watch the headlines all the time."
401(k) investors must remember periodic retirement plan contributions deducted from each paycheck forces you to automatically dollar-cost average. And that means you're buying more shares of a fund in your retirement plan when the net asset value is lower due to market declines, adds Williams.
Get Your Retirement Portfolio Glide Path Right
Retirement savers with longer time horizons, such as those planning to hang up their careers in 15 or more years, also have more time on their side to wait for a market recovery.
"Time horizon matters in terms of how much capacity and ability you have to weather that volatility," said Williams. "Your risk tolerance also factors in to the equation, in terms of how much comfort you have with ups and downs of markets."
Based on your age, shift your asset mix between stocks, bonds and cash. Make sure you have assets in your portfolio that will continue to grow. But also have some more stable income-generating assets to support your near-term spending.
In general, as you get older, you'll want to lower the volatility of your portfolio by increasing your exposure to fixed-income assets and reducing your stock exposure.
Young savers should welcome market dips, adds Bellin. "Volatility should put a smile on your face, especially if you're early in your career and putting money in from each paycheck into the 401(k) and buying more shares," said Bellin.
Boost Confidence With A Plan
You're more likely to stay the course if you have a retirement plan in place, according to a Charles Schwab survey. Only 36% of Americans say they have a written financial plan. And three in four who do have one say it makes them feel more in control of their finances, according to the survey.
There's an upside to having a financial plan that includes an asset allocation that matches your risk tolerance and time horizon. "You tend to feel more confident that you don't need to make major changes to your portfolio," said Williams.
Don't swing for the fences. The less risky your portfolio is the less volatile it will be. So, don't only invest for a home run.
"I think if you can live with the fact that you may not always hit all of the high notes in order to avoid hitting the low notes, you're going to shrink that range (of performance outcomes), and shrink that volatility," said Bellin. "If you stop chasing returns, then you kind of insulate yourself from making extreme moves in bad times based off of fear and emotion."
One final tip: Don't overreact to negative news headlines, adds Lee.
"When you see the headlines come across the news about volatility in the market, your reaction should be looking at your wealth plan and reminding yourself that you assumed this risk in order to achieve your goals," said Lee. "Your reaction should not be focusing on the red across your computer screen or TV."
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