Is the Sky Falling? How to Handle Market Volatility

 

Stock Market Volatility

Spoiler alert: no, the sky is not falling. Don’t let the financial media get you riled up when they start trying to develop an emotional frenzy. When you start hearing dramatic reports about the stock market from media outlets, it’s important to understand that the actual data paints a very different picture than the talking heads on your TV or radio.

There’s a reason for that! News outlets have something to gain from creating a highly charged emotional environment – they get more viewers and more engagement. And nothing drives more people to tune in than negative emotions like fear, anxiety, and panic.

Financial media outlets often push stories to get a reaction out of their audience, so keep this in mind the next time you hear a news anchor making doom and gloom predictions about the market.

In today’s episode, Brian and Bo go beyond common sense in order to help you understand how financial markets work when you invest for the long term. They talk about how you can manage your emotions during these times when it’s all too easy to irrationally give into an atmosphere or group panic, and they give tips on strategies you can use to make the most of swings in the market.

You will learn:

  • What volatility really is…
  • …and what market volatility has to do with puppies. (Yes, puppies.)
  • The right perspective to keep when thinking about market volatility.

Brian and Bo also share advice for managing your own emotions when we experience big changes in the market:

  • Know where you are in terms of your long term investing plan.
  • Understand all aspects of risk. It’s not just about risk tolerance!
  • Recognize your own blind spots and know your own experiences will shape your perspective and behavior.
  • Accept that you will need a lot of perseverance to hang in for the long haul, but understanding the cycle of market emotions can help you manage your own.

The guys wrap up with a discussion of the financial tools and strategies you can use to handle market volatility wisely – and come out ahead of the average investor who tends to buy high and sell low.

Target Date Retirement Funds Pros and Cons

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Target date funds have been around for two decades now and they continue to evolve and find their place in more and more portfolios. The funds are typically inexpensive and give you a great amount of diversification while targeting an appropriate amount of risk to fit your financial timeline.

When target date funds were introduced they were designed for 401k plans as an end-all-be-all investment for participants. Now these investments seem to make their way into most portfolios, across multiple accounts, and sometimes appear as a single investment in an entire portfolio. Target date funds are actually very versatile, becuase these funds follow a “glide path.” This basically means that, as the target date approaches, the funds’ allocation tends to glide down a path to a more conservative allocation. Since their introduction, target date funds have become more efficient, more affordable, and more diverse.

To show how popular these investments have become, consider this, in 2013, 1/3 of net flows to mutual fund companies have been into target date funds. Check out the statistics for the three largest target date fund companies in the market:

Percentage of net flows that are invested in target date funds:

Fidelity:                50%
Vanguard:            16%
T. Rowe Price:     95%

Since the great recession, most target dates funds accelerated their downward glide path to a more conservative allocation. Pre-2008 equity exposure for close-to-retirement based funds have seen decreases in equity exposure from upward of 50% down to 35%. We have seen this trend of target date funds that are within 5 years of their target becoming much more conservative, with the exception of the Fidelity Freedom Funds, who have increased equity exposure from their previous norms.

Brian and Bo love target date funds when starting out, because of the ease and sophistication that comes in one holding. At some point, though, when you start adding multiple accounts, larger amounts of money, and bigger tax implications, more advanced planning is advantageous.

ConsumerReports did a great article on how to select the optimum target date fund for your situation. Most of the data in the show comes from Morningstar’s annual target date webinar and their 2014 Target Date Series Research Paper.