Peace in Security: The Value of a Financial Plan During Market Volatility

Peace in Security: The Value of a Financial Plan During Market Volatility

June 14, 2022

You felt good about your portfolio before this recent market volatility because it was built on sound investment principles—time horizon consideration, asset allocation, diversification—and it was growing. With the recent downturn in the market, you may now find yourself starting to question your confidence. It can be a shock to your system when you login and view your lower account balance and a brutal reminder that the market does not care about your goals or risk tolerance. But your investment portfolio is not your financial plan—it is one component of it. Your financial plan is built with your goals, risk tolerance, and cash-flow needs in mind.

A Light in the Darkness

A financial plan helps provide a better idea of how to achieve your goals. It allows you to see the different components that make up the plan and how they work together to achieve long-term outcomes. A well-designed financial plan can serve as the confidence boost you need to brave the unknowns in the market, especially when volatility hits hard. Any good financial plan is dynamic. It has enough structure to help achieve goals, but enough built-in flexibility to account for changes over time. Changes come in the form of market changes and adjustments as well as life changes.

You may switch jobs, purchase a new home, add to your family, or get a divorce.  You may experience a change in income or enter a new tax bracket. You may hear about the hottest new investment trend and want to make a move or steer clear. You may decide to go ahead and file for your Social Security benefit as soon as you turn 62 or postpone filing to take advantage of deferred credits.

Too often, people believe their financial plan is set in stone. Fear sets in and they become afraid to make changes. You don’t want to get “off track” so you don’t want to adjust your goals—but goals change. As your goals evolve, your plan must adjust, too. Let your plan shine a light in the darkness of market downturns.

Reality Check

There is no way to predict which mix of assets will return 10% a year for the next 10 years. Each year, one can expect the market to experience a significant correction, which for the S&P 500 has averaged approximately 14% since 1980.1 But this is an average, not annual return. History has shown that those who chose to stay the course were rewarded for their patience more often than not.

Intra-Year Declines vs. Calendar Year Returns

A well-designed financial plan accounts for the various scenarios that life could throw at you. Financial plans shine during times of market volatility if you have the courage to trust the process.

What now?

You have a financial plan, but you’re still fearful about losing everything. What should you do? Reach out to your financial planner to hear their thoughts. They will be happy to help remind you about the construction and components of your plan and offer their thoughts for your consideration. With a strong game plan and access to resources to help support you, you decrease the risk of being unprepared for outside circumstances that could negatively affect your financial situation. Focus your energy on what you want to do with your money and filter out the noise and trends that could pull you off track.

The impact of emotions

You’re human, so naturally you will feel the impact of market fluctuations in one way or another. Plans exist to help keep emotions at bay. We look for something, someone to turn to when things get rocky to help ease our mind and keep us from acting irrationally. Remember, emotions can distract from your goals and make you see things through a short-sighted lens. Emotions can potentially derail your best-laid plans. Instead of allowing current market circumstances to dictate your actions, turn to your financial plan as your compass and guide.

Peace in Security

As the saying goes, one thing you can always predict is that markets will be unpredictable. It is your financial planner’s job to collaborate with you to design a thoughtful plan that accounts for your financial goals and builds in flexibility to account for uncertainties that could derail your plan. This provides the confidence you need to power through the hard times.

If you have a financial plan, stick with it. Remember it is dynamic and evolving, but the fundamentals are sound. If you don’t have a plan yet and are focusing solely on investment advice, you are missing out on the peace of mind and security that a comprehensive financial plan can provide.

“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb


Source: Bloomberg, First Trust Advisors L.P. *As of 4/29/2022. Past performance is no guarantee of future results. The benchmark used for the above chart is the S&P 500 Index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. Returns are based on price only and do not include dividends. This chart is for illustrative purposes only and not indicative of any actual investment. These returns were the result of certain market factors and events which may not be repeated in the future.