What you need to know: Keeping your
investment plan on track during times of market volatility

When you include the significant market gains in the years leading up to 2020, the U.S. stock market posted well-above average gains in 2019, 2020, and 2021. 

Taking the right steps to weather volatility. What can investors do?

Taking the right action – or even just staying the course – is emotionally hard to do.  Working with an advisor and utilizing professional portfolio management can provide the guidance, counterbalance, and confidence to help you stay on track towards your long-term financial goals.

So, what can and should investors do?  While there are many strategies and actions one can take, according to TIAA Trust, N.A. Chief Portfolio Strategist, John Canally, there are six keys to help investors manage through, and even potentially take advantage of, market volatility:

Most investors understand that to effectively manage risk, portfolio investments need to be spread among a well-diversified mix of securities. That may include stocks of small and large companies, U.S.-based and international equities, short- and long-term bonds, and both international and domestic bonds.

Effective diversification takes a number of factors into consideration, including the correlation between markets (what markets are up, which are down), asset classes and investment types. It also includes whether holdings are actively or passively managed, as well as your personal goals, risk tolerance and investment time frame, among other criteria. However, simply owning a lot of different assets is not enough. In addition to the number of securities you own, you want to determine if underlying holdings overlap—resulting in double or triple ownership in the same investment types or asset classes, which can undermine your strategy.

“For example, if you own an index fund that invests in a large number of U.S. stocks, you may enjoy a degree of diversification across U.S.-based companies”, said Canally. “However, when U.S. stocks fall all at once—that provides little overall protection for your portfolio.”

The chart below shows the ranking of individual asset class by investment returns from high to low from 2007-2021.  What quickly becomes clear is that it is determining the winners (or losers) in any given year is next to impossible.  That’s why diversifying your investment across asset classes is so important.

Finally, look at the next chart. We’ve drawn a line through the historical returns of a diversified portfolio of 60% stocks and 40% bonds.  While not the winner in any given year, the returns are much more stable.  

The moral of the story? If you were solely invested in any single asset class over the past 15 years, you were in for a wild ride. That's why diversifying your investments across a wide variety of asset classes—as opposed to concentrating in just a few holdings—improves the likelihood that, on balance, you will have a positive overall return, or at least a less negative return.

"This relative stability is why, even when markets are down, a properly diversified portfolio can improve the likelihood of achieving your goals and provide a smoother ride along the way," Canally said. To achieve that end, it's critical to align your diversification strategy with your goals, the time frame for achieving them, and how much risk you're willing to take as an investor to accomplish them.  Of course, past performance is not a predictor of future performance.

As markets shift over time, a strategy that includes regular portfolio rebalancing is critical for managing risk. That's because market swings can throw your target allocation, that is, how you allocate your investments across different asset classes to achieve the balance between risk and return, out of alignment with your goals and risk tolerance, creating the need to rebalance your portfolio.

When your target allocation becomes misaligned with your goals, you can rebalance by moving money from investments that take up a greater portion of your portfolio than desired into those that could use a boost—to get back to your target allocation.

For example, the steep downturn in the stock market in early 2020 caused allocations to equities to shrink.  If you refilled that equity bucket, it helped position portfolios to take greater advantage of the upswing in the second half of the year and beyond – a recovery of around 75% from the March 2020 lows through the end of June this year.   

The opposite is true after an extended period of stock market outperformance.  The chart below illustrates the concept of rebalancing after strong stock market performance caused the portfolio to be significantly overweight in U.S. and international stocks, and underweight in real estate and bonds in this example.

As a general rule, covering 2/3rds of your expenses (see the chart below) in retirement with sources of guaranteed income can put in place an income foundation. This can reduce stress and help ensure that you are in a good position to maintain your lifestyle, even during times of extreme market volatility. "When we talk about lifetime income, we're talking about creating a dependable income stream you can't outlive using your various income-generating assets in retirement," Keady says.

These include Social Security, a pension (if you have one) and fixed annuities, which provide guaranteed income. These income sources combine to create a foundation to ensure your essential needs are met for food, shelter, clothing, transportation, and healthcare over a period of 20 or 30+ more years in retirement.

The role of fixed annuities

Fixed annuities, which provide guaranteed income,² can play a significant role in helping to create a buffer against market volatility for those still accumulating assets, as well as those taking income from their portfolios in retirement.

While much attention has been focused on the severe stock market downturn, bond funds have experienced unprecedented declines.  However, during the same period, fixed annuities did not fall in value. Instead, they increased in value by the interest they earned.

Guaranteed income has provided a lot of stability for people since their portfolios rose by the amount of interest they earned during that period. That continues to be important in the current environment where lower bond market returns are expected to persist for some time. Keady believes that the key to weathering any market or economic storm is having that "ballast" in the ship to help keep it afloat when rough seas are encountered.

"Being able to see guaranteed income in your portfolio during times of increased uncertainty can also provide a positive impact from a psychological perspective," he said. "For many people, that can help keep emotions in check when the markets become increasingly volatile."

What’s the bottom line?  

We continue to expect a difficult market environment for the rest of this year for both stocks and bonds. But remember, we’ve just come off three well-above average years for stocks and bonds in 2019, 2020, and 2022. Inflation likely peaked in the first quarter, but markets and the Fed want to be sure. The market has already priced in another 175 -200 bps of rate hikes this year. The economy and earnings growth is already cooling off and may slow further as the year progresses. TIAA’s managed accounts are positioned in light of this view, and remain well-diversified. Behind the scenes, portfolio managers conduct ongoing monitoring of portfolios, conducting tax-loss harvesting and rebalancing as market conditions warrant.

Want to learn more?

Your TIAA advisor can review your investments and financial plan with you to help make sure you’re taking all the right steps to minimize the impact of market—while helping stay on track to pursue your financial goals.