A playbook for market volatility
Don’t get spooked by market swings—learn how to manage your portfolio for them.
Summary
- Rather than trying to time the market during volatile periods, staying invested typically leads to better long-term returns, as history shows the market’s best days often occur during times of heightened uncertainty.
- A well-diversified portfolio—both across and within asset classes—can help protect against market volatility, with different assets like stocks and bonds often moving in opposite directions during market stress.
- Dollar-cost averaging and tax-loss harvesting provide practical strategies to manage volatility: Regular, consistent investing helps avoid emotional timing decisions, while harvesting losses can create tax advantages during market downturns.
Market volatility: The cost of nervous decisions
We’ve all seen this scenario: Something shocks the markets, and investors get jittery. Overcome by emotion, investors pull money out of stocks, thinking it will help preserve their nest eggs. The problem is they don’t know when to get back in. They wait too long, inevitably—until stock prices are much higher—and wind up worse off financially than if they’d done nothing at all.
So, what should investors do when volatility spikes and prices of the major indexes fluctuate broadly? Here are some time-tested strategies for staying grounded and financially on track when you’re watching the market—and your account values—fall.
Stay invested, don’t time the market.
Investors who stay fully invested tend to be rewarded over the long term. Why? Timing the market can lead to missing the largest gains and locking in losses. The chart below shows how missing just a single day of positive returns can have a negative effect on your investments. In fact, the 10 best days in the S&P 500 over the past 25 years came during periods of heightened volatility. If emotion drives you to the sidelines—by shifting to hoarding cash instead of staying invested—market timing may keep you from maximizing your returns.
Missed opportunities
Staying invested vs. missing the best days of U.S. stock market performance
Source: Morningstar Direct, January 1, 2005 through December 31, 2024 daily returns. The returns are the average annual return over the past 20 years. The bars represent what would have happened if you'd missed the best 10, 20, 30, 40 or 50 days for the S&P 500 Index during the 20-year period. Past performance is no guarantee of future results. This is for illustrative purposes only. This is not indicative of any investment. An investment cannot be made directly in the index. The S&P 500 index is based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
“If you sell, you may be locking in losses, and someone else is buying your investments at a discount,” said Evan Potash, executive wealth management advisor at TIAA. “I remind my clients that we are prepared for market volatility because we have diversification within the portfolio. This includes owning large, middle and small domestic companies along with international, emerging markets and real estate. Most of my clients also have guaranteed annuities, bonds and cash in their portfolios, which provide income and lower the volatility of the portfolio.”
While staying the course may make theoretical sense for most investors, it’s important to remember that saving for retirement isn’t a theoretical exercise. It’s real life, and not everyone is psychologically wired to just ride it out when markets get scary. “If your mental health is starting to suffer—if you’re losing sleep at night over market volatility—that’s a good indicator you may have taken on too much risk exposure to begin with,” said Melody Evans, a vice president and wealth management advisor in TIAA Wealth Management’s Portsmouth, N.H., office. “Work with your advisor to determine an appropriate amount to move to safer investment vehicles, so you can move on to other things in your life.”
Diversify by and within asset classes.
A diversified 60/40 portfolio—60% in stocks and 40% in fixed income products like bonds and annuities—is a Nobel Prize-winning concept dating back to the 1950s. Because stock and bond prices tend to move in opposite directions, the 60/40 portfolio is built to generate steadier returns during periods of market volatility. The equity allocation drives growth during bull markets, while the bonds provide downside protection during bear markets.
Of course, diversification strategies should be tailored to your unique situation. A young professional just starting a career will have a longer time horizon and more risk tolerance, opting for a portfolio with more exposure to growth stocks than the typical 60/40 portfolio. Likewise, a 65-year-old who has saved over the past 40 years and is planning on retiring soon may opt for a more conservative portfolio prioritizing capital preservation over growth.
Target date funds offer a hands-off way for savers to rebalance investments and throttle down risk as they age. Commonly offered through 403(b) and 401(k) plans, target date funds automatically rebalance your portfolio’s assets based on years until a chosen retirement date. The closer you get to retirement, the more conservative your investments become.
Just as diversifying across asset classes helps mitigate volatility, so does diversification within them. A crisis in one region of the world or one industry shouldn’t sink your savings. Investing across multiple regions and sectors helps reduce concentrated market risks.
“The tariff tumult drove home the importance of maintaining a well-diversified portfolio,” said Niladri “Neel” Mukherjee, chief investment officer of TIAA Wealth Management. “While it was a rough week for most investors, international stocks and high-quality U.S. bonds held up much better than the U.S. stock market.”
Work with your financial advisor to find high-quality stocks and bonds representing varied exposure to different regions, sectors and company sizes. Though no portfolio is completely immune to volatility, diversification across and within asset classes tends to increase a portfolio’s risk-adjusted returns.
Reduce the effects of volatility through dollar-cost averaging.
Another way to smooth returns is dollar-cost averaging—investing consistent amounts at regular, pre-determined intervals. Rather than investing $10,000 in stocks all at once, you might invest $1,000 a week instead. This system eliminates the emotional guessing game of wondering if it’s the right time to invest. If you wind up buying high one week, you may buy low another. The good news is that if you participate in a company retirement plan, you’re already doing this through regular contributions of the same amount from your paycheck.
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Take advantage of downturns by harvesting losses.
In down markets, tax-loss harvesting can help investors reduce future tax bills. Selling investments that are down generates losses that can be used to offset gains from your winners, thereby lowering capital gains taxes. For example, when nearing the end of the calendar year, you anticipate a significant capital gains tax bill from your taxable accounts. You can sell losing investments now, replace them with similar (though not identical) investments and use the losses to offset capital gains on stocks you sold at a profit. Any losses not used to offset gains can be used to reduce your regular taxable income by up to $3,000 a year. Losses can also be carried forward to offset capital gains in future years.
Contact your advisor.
For personalized suggestions on how to prepare for and respond to market volatility in your portfolio, talk to your TIAA Wealth Management advisor. Don’t yet have an advisor?
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The TIAA group of companies does not provide tax or legal advice. Tax and other laws are subject to change, either prospectively or retroactively. Individuals should consult with a qualified independent tax advisor and/or attorney for specific advice based on the individual’s personal circumstances.br> The views expressed in this material may change in response to changing economic and market conditions. Past performance is not indicative of future returns.
This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances, which should be the basis of any investment decision.
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