Written by: Gilles Hudelot, Director of Education
When you see bad news about the stock market, inflation, or the economy in general, it is a good idea to step back and really consider the big picture. This can help you gain some much-needed perspective and avoid making rash decisions with your money. While a sudden market downturn or spike in inflation is never fun to live through, remember to go back to the fundamentals of financial wellness. More specifically, you should focus on the things that you can control rather than stressing about the things that you cannot.
Maintaining Control During Market Uncertainty
You cannot change or control many things in this world. Things like political events, stock market volatility, and the price of goods are all beyond your individual control. For this reason, it is important for the sake of your mental and financial well-being to focus on the things that you can control, like your spending, savings, debts, and investments. This way, even when things like stock market uncertainty are clogging your news feed, you can return to financial fundamentals that are within your power to change and maintain.
Financial mentors will always advise you to spend less than you make. At Mentoro, we recommend aiming for the 80/20 ratio. Ideally, you should be spending no more than 80% of your income and using the remaining 20% to reach your financial goals. By using this strategy, you have the flexibility to handle economic uncertainty and market volatility without having your entire financial plan crumble before your eyes. For example, if you are spending 80% of your income and gas prices suddenly increase, you will have less money to put toward your financial goals, but you will still be able to pay your bills until prices settle down again. Alternatively, if you are living paycheck to paycheck (i.e. spending 100% or more of your income), a sudden increase in gas prices could disproportionately affect your finances and your life.
We recommend having an emergency fund of at least $1,000, but ideally, you should have enough savings to cover 3-6 months of expenses. If larger economic changes lead to market uncertainty or a rise in inflation, you will still have the cash on hand to address any short-term issues. But again, if you live paycheck to paycheck and have no savings, any shifts could put a lot of strain on your finances.
Assuming that you have a moderate or even high amount of debt, you may be at the mercy of rising interest rates. This will make it more difficult to ride out uncertain economic times. If you are worried about whether or not to invest during market volatility, you can always choose to use your additional funds to pay down debt instead. This is a particularly good option if you have credit card debt with double-digit interest; paying off the debt means getting double-digit savings with that money.
Finally, investing should involve a reevaluation of your objectives, risk tolerance, and time horizons. There will always be a hot new trend to tempt you. For the last few years, it has been cryptocurrency, but a decade ago, it was housing and two decades ago it was dot-com businesses. In all three cases, many people completely unraveled their finances by putting too much of their money into risky assets. Additionally, you could be setting the unrealistic expectation that these investments will make you a lot of money in a short period of time without really understanding the underlying risk involved.
A Guide to the Markets During Uncertain Times
When you understand that all investments have a cost and a risk, then you can start making better decisions with your money. First, evaluate your time horizon. If you need the money back for a certain goal within the next 2-3 years, then taking a risk in the market is unwise because there is a high chance the investment could lose value. If your time horizon is 5-10 years or longer, then you might consider taking on more risk, because you have more time to ride out the ups and downs of the market. Additionally, you can look at diversifying your portfolio to have investments in categories that might move at different times.
Thus, your time horizon is one of the most important factors to consider when making investment decisions during market volatility. A lot of people get stuck on the idea that they need to make X amount of return or make a lot of money quickly off the hottest new investment, but this kind of short-term investment is like gambling. There is just as much chance that your investment will go down as it will go up.
Market uncertainty is bad, but it is also completely normal. Volatility has happened in the past and it will happen again. Fortunately, these uncertain periods have always passed with time. For this reason, it is almost always better to invest with a long-term mindset, as you can almost guarantee that the market will get over any short-term hiccups and allow your investments to grow. If you need the money soon, then there is no point in taking a risk with a short-term investment.
Age is also an important factor to consider when navigating market uncertainty. Typically, younger investors can ride out bear markets more easily because they have more time. That said, you need to know your risk tolerance based on your personal time horizon. Can you sleep at night if you see your portfolio drop by 10%? If not, you may have low risk tolerance and you should consider rebalancing your portfolio to protect your assets. At the same time, you do not want to be so conservative when you are young that it hurts you over the long term. As you get older, you will usually want to adjust your portfolio to make it more risk tolerant. However, you still have 20-30 years of retirement, and you still want to have money invested in equities to outpace inflation. Therefore, it is important to focus on a balanced, level-headed approach that does not get bogged down by short-term drops in the market.
Navigate Market Uncertainty with Mentoro
With Mentoro’s online portal, you can evaluate your risk tolerance and learn how to allocate your funds based on your time horizon. You can also use the spending & budgeting tool to track all of your transactions. The tool will automatically flag potentially wasteful expenditures and categorize your expenses into relevant categories. This allows you to really get into the details and see where you can spend less. Moreover, Mentoro’s portal tools can help you set savings goals, manage debt, and use retirement calculators. Lastly, when it comes to personal finances, talking to someone can be really useful. Consequently, Mentoro offers one-on-one consultations with financial mentors and educators to help you reach your goals and get through uncertain times.
If you want to learn more about how to navigate market uncertainty in 2022 and beyond, be sure to contact the experts at Mentoro today!