By Joel Chouinard, ChFC®
March 20th, 2025
Here we go again. After a strong couple of years for financial markets, volatility and market uncertainty are back in the picture. Along with that comes the uneasy feeling of watching our investments go down. So, how can we better navigate market volatility as young investors?
I will start by saying this. I am not sitting atop my ivory tower writing this article on how to better manage your emotions around market volatility. I experience these emotions, too. It’s completely normal to feel uneasy, anxious, or even fearful when you see your investments drop in value. But you know what else is completely “normal” and part of investing: market volatility. It’s not a matter of if the markets will drop, it’s a matter of when. In fact, history tells us that we will experience a market downturn every 5.1 years*. So, the key is to set up our investments in a way that removes emotions from the decision-making process, which can help prevent costly mistakes. Here are three different strategies to help you navigate market volatility as a young investor.
1. Allocating Your Money Across Different “Buckets”
Bucketing is a strategy that involves allocating your money across multiple different “buckets” that each have a specific timeline and purpose. The key is that you invest the money inside those buckets according to when you will need it. Those buckets can usually be split between long-term, medium-term, and short-term.
The long-term bucket is typically for accounts that have a ten-plus-year timeline. For example, your 401(k) is a long-term retirement vehicle, so depending on how old you are, you may not touch this money for decades. This means you can afford to be more aggressive because a short-term market dip will not impact you. In other words, you have the luxury to ride the wave, even if it’s a big one. Your medium-term bucket is for goals that have a timeline of 2-10 years. This money should also be invested but should be in a much more conservative portfolio than your long-term bucket. The reasoning is you have less time to make your money back if your portfolio dips, but you still have a long enough runway to take some risk.
Your short-term bucket is for goals that have a timeline of less than two years. For example, your emergency fund is short-term money that you set aside in case something bad happens. And because you have no clue when that could happen, you cannot afford a short-term market dip. That’s why it needs to be invested in a guaranteed account, such as a high-yield savings account. You could also have multiple short-term buckets for other short-term goals like a downpayment on a house or house renovations.
Ultimately, having your money in the right bucket can help prevent making irrational and emotional decisions, such as selling out your investments at the wrong time.
2. Diversify Your Portfolio Across Multiple Asset Classes
I think most people nowadays understand the concept of not putting all of our eggs in the same basket when it comes to investing. With the rise of low-cost index funds over the past two decades, investors only need a few hundred dollars to buy one of the many S&P 500 index funds. In turn, they instantly own a small portion of the 500 biggest companies in the U.S. Talk about diversification!
Although that’s a good start, I encourage my clients to go a step further with diversification by adding exposure to other asset classes, such as international stocks and bonds. The reasoning is that different asset classes behave differently in certain environments. For example, during the 2000s decade, large U.S. stocks, which are represented by the S&P 500 index, performed really poorly. First, there was the Dot-Com bubble burst of the early 2000s and then the Great Recession of 2008. In fact, an investment in the S&P 500 at the beginning of 2000 would have yielded an annual return of approximately -0.95% by the end of 2009**.
For comparison, the MSCI EM Index, which represents stocks in emerging markets, such as India and China, returned an average of 9.78% per year during the same period. The Bloomberg Barclays U.S. Aggregate Bond Index, which represents the investment grade U.S. bond market, returned an average of 6.33% per year in the 2000s decade***. Bonds performed better than stocks!
The Case for Asset Allocation
That’s why it’s important to build portfolios that have exposure to different asset classes, also known as asset allocation. When one asset class performs poorly, as in the case of large U.S. stocks during the 2000s decade, other asset classes pick up the slack, reducing the ups and downs in your portfolio. Your asset allocation (the mix of various asset classes in your portfolio) will depend on your time horizon and tolerance to risk. As we discussed in the previous paragraph, if you have a high tolerance for risk and a long-term horizon, you will want more exposure to U.S. and international stocks and less exposure to bonds. Vice versa, if you have a low tolerance for risk and a shorter time horizon, you will want more exposure to bonds.
3. Dollar-cost averaging
Another strategy that can help you better manage your emotions around investing is something called dollar-cost averaging (DCA). Think of it as a steady, consistent approach to investing, similar to the monthly contributions you make to your retirement plan. Instead of trying to time the market perfectly, invest a fixed amount of money at regular intervals, say every month, no matter what the market is doing.
Now, how does this actually help, especially when things get a little crazy in the market? Well, when stock prices dip – and they will – your regular investment buys you more shares. Conversely, when prices are higher, the same amount of money buys you fewer shares. Over time, this consistent buying pattern can lead to a lower average cost per share than if you had just invested a large lump sum all at once, potentially at a market peak. It's like getting more for your money when things are on sale.
Beyond the numbers, dollar-cost averaging can also bring some much-needed peace of mind. Let's face it, you've got enough on your plate without constantly worrying about when to perfectly time your investments. This strategy helps you avoid the emotional rollercoaster of trying to buy low and sell high, encouraging a disciplined, long-term perspective. It's about consistently putting your money to work and recognizing that market volatility, while sometimes unsettling, can actually present opportunities for long-term growth.
Final Note
Remember, when the market starts doing its unpredictable dance, you're not alone in feeling those emotions. But the good news is, by thinking strategically about where your money is allocated with bucketing, spreading your investments across different asset classes (not just U.S. stocks), and consistently investing through dollar-cost averaging, you can really take some of the stress out of the equation. These aren't just abstract ideas; they're practical steps you can take to manage risk and stay focused on your long-term financial goals, even when things get a little bumpy.
Sources
** https://www.dimensional.com/us-en/insights/a-tale-of-two-decades
*** https://www.forbes.com/sites/advisor/2010/09/13/its-not-really-a-lost-decade/
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