Planning Points: Don’t let volatile market alter your plan

It’s been said that volatility is a “tax” that investors have to pay for harnessing the wealth-building power of the financial markets. But rationalizing market fluctuations doesn’t make them any less nerve-wracking, especially if you’re nearing retirement age.

Some investors react to volatility like they’re living in the path of a hurricane. They board up the windows, gather the essentials, stay put and hope the storm passes without hitting too hard. Others may get nervous and want to sell some investments and move the proceeds to cash.

The truth is, if you have prepared appropriately for market volatility, then normal market fluctuations shouldn’t be a concern, and you should continue living your life and spending your money as you usually do.

Now, not everybody has “prepared appropriately.”

Here’s a three-point checklist to see if you have done the work necessary to keep your finances on track, regardless of what the financial markets throw at us.

1) You have an investment plan that covers all your bases.

No financial plan is totally immune to market fluctuations. But by diversifying your investments across stocks, bonds and other financial vehicles, it may alleviate the exposure that a single market event is going to jeopardize your long-term security.

It also is helpful to have both long- and short-term savings “buckets” that can be utilized, depending on your age, goals and how close to retirement you are.

This combination of diversified assets and a healthy savings may provide some stability. It also may provide flexibility that can be used to address potential problems or to take advantage of opportunities that might benefit your overall portfolio.

Where you have the most direct control over your finances is your personal spending.

If you’re retired, it’s always important that you spend within the boundaries of your annual withdrawal plan. Younger investors might consider increasing their planned savings contributions during a downturn, especially if they’re counting on that money for a home or auto purchase in the near future.

In short: Sticking to your plan and living within your means are two of the best financial moves anyone can make during market volatility.

2) You understand your relationship with money.

A primary focus of wealth planning is to make people more aware of what their relationship to money is really like.

For instance, early on in the process, interactive tools and discussions can be used to identify the comfort levels of a client and how investing in the markets can impact that comfort in different scenarios.

Comfort is my priority when building a wealth plan. Return is relevant but is not pursued at the “expense” of comfort. Identifying these issues up-front lessens the likelihood of a surprise later.

It is important to have each spouse provide independent responses to questions of comfort and goal expectations. Unfortunately, fear and greed are the primary emotions that drive financial decisions at the extremes. Building a plan proactively when these emotions are not present can help create an objective discipline for your plan.

Market volatility can trigger some emotional decisions at both ends of the scale.

During extreme down markets, “worrisome” investors may feel the need to over-allocate to cash, bonds, CDs and other lower-yielding options that may cripple their long-term wealth-building.

Overly “optimistic” investors might see “buy low” signs everywhere they look and get in over their heads.

Creating a plan ahead of time allows clients to “weather” the storm, knowing they have prepared for it.

The goal is not to make changes during the storm but to build a ship that will withstand the volatility along the way that is within an acceptable comfort zone. It doesn’t mean you have to be happy about the volatility, but having comfort realizing it is an inevitable event that has been prepared for.

Having someone in your life who understands your attitudes towards money can be one of the biggest benefits when developing an objective plan. It is important this person knows you, your history and your goals before you let bad news or scary headlines distract you from a well-thought-out plan.

3) Your focus is long-term, not short-term.

The markets have provided a great deal of volatility over the past several months and may continue to do so.

Short-term interest rates are now higher than longer-term rates, and that is sometimes a cause for concern about the direction of the economy over the next 12 to 24 months.

Major stock market averages have struggled over the past year and, while not unusual, still grab the attention of investors in addition to the ongoing global and domestic turmoil.

Investors who try to time their investments to these or any other economic signals are looking at market history through a dangerously narrow lens.

The ultimate size of your nest egg won’t be determined by one week, one month or even one year. True wealth can be built up slowly, over decades of steadfast saving and investing, careful planning and thoughtful rebalancing when necessary.

Establish your priorities and stay focused on the long-term aspects of your plan.

Pete Alepra is managing director-financial adviser with RBC Wealth Management. Comments: (319) 368-7023; peter.alepra@rbc.com. Investment and insurance products offered through RBC are not insured by the FDIC or any federal agency, are not deposits or guaranteed by a bank and are subject to investment risks.