By Chris Kampitsis and Ben Soccodato
While no one can predict what the market will do, summer months have historically seen increased volatility as trading volume slows and investors react to economic data, interest rates, earnings reports, and global events.
The combination of thinner markets and a steady stream of headlines can create an environment where price swings feel more dramatic than they actually are.
The good news? Volatility is something you can plan for.
Why Summer Volatility Happens
A few factors tend to make markets choppier in the summer months. Trading volume typically drops as institutional investors and portfolio managers step away for vacations, which means less liquidity in the market and more exaggerated price swings in either direction. When fewer participants are actively trading, it takes less activity to move prices in a major direction.
Add in mid-year earnings reports, shifting economic data, and geopolitical developments that don’t take summers off, and you have a recipe for unpredictability. None of these factors are necessarily alarming on their own, but together, they can make the summer months feel more turbulent than the rest of the year.
Volatility Is Normal. Panic Is Optional.
It’s easy to look at a down week and feel like something is fundamentally wrong. But market volatility is a normal and expected part of investing. The markets have rewarded investors who stay the course far more consistently.
The investors who tend to get hurt are the ones who sell at the wrong time and then struggle to get back in at the right one. Trying to time the market is a difficult game, and the cost of getting it wrong can impact long-term outcomes.
A well-constructed financial plan accounts for volatility. It gives you a framework for making rational decisions when emotions are running high.
What To Do When Markets Get Bumpy
Here are five principles to keep in mind when volatility picks up:
• Don’t make emotional decisions. A down day, week, or even month is not a reason to abandon a long-term strategy. Knee-jerk reactions to volatility are one of the most common, and costly, mistakes investors make.
• Revisit your risk tolerance. If market swings are keeping you up at night, that’s useful information. It may mean your portfolio is carrying more risk than you’re actually comfortable with. Now is a good time to have that conversation with your advisor and make sure your allocation truly reflects how you feel about risk.
• Look for opportunity. Volatility cuts both ways. For long-term investors, market pullbacks can create buying opportunities in quality assets at more attractive prices. What feels uncomfortable in the short term can be advantageous over time for those with the patience to see it through.
• Stay diversified. A well-diversified portfolio is your best defense against volatility. When one asset class pulls back, others may hold steady or move in the opposite direction, thus reducing the overall impact on your portfolio.
• Keep perspective. Markets have weathered recessions, geopolitical crises, pandemics, and everything in between. Despite it all, they have recovered and reached new highs. Short-term noise rarely changes the long-term story for disciplined, patient investors.
The Three-Bucket Approach
Rather than thinking of your portfolio as one pool of money reacting to whatever the market does on any given day, this framework divides your assets into three distinct categories based on when you’ll need them.
The first bucket holds cash and conservative investments set aside for short-term expenses or unexpected needs. Knowing this money is readily available means you’re far less likely to feel forced to sell investments when the market is down. The second bucket is for money that isn’t needed right away but still deserves some protection. Depending on your situation, this could include strategies that provide downside protection while still allowing for growth if the market performs well.
The third bucket is the portion of your portfolio built for the long term. Since this money may not be needed for many years, it can stay invested through market fluctuations and benefit from long-term growth over time.
The goal is to build a plan strong enough that you don’t have to predict market volatility.
We help clients stay calm, stay focused, and stay on track, especially when markets make that harder to do. If you have questions about your portfolio, reach out to a member of the SKG Team. We’re here to help!