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War, credit convulsions, artificial intelligence (AI) disruption … think there may be some severe market volatility ahead?
“Market volatility isn’t a flaw in the system; it’s a feature,” noted Daken Vanderburg, chief investment officer for MassMutual Wealth Management. “Investors are compensated over time precisely because markets are uncertain in the short run. … History shows that markets have often recovered, but individual investors don’t always benefit from that recovery if fear forces bad decisions. The goal of a good financial plan is to make sure volatility doesn’t derail long-term outcomes.”
So, is your financial plan on track and ready to withstand turbulence? Here are three things to check.
- Your age versus your asset allocation.
- Diversification of your investments.
- Your financial foundation.
Most investors are familiar with these concepts. Indeed, they are typically the first things people are introduced to when signing up for an employer’s qualified plan or establishing their own retirement account. (Related: Investing basics: What you need to know)
But even savvy investors need a nudge to check on them from time to time. Market volatility storm clouds are a good reminder.
“Volatility is inevitable, even in traditionally ‘safe’ asset classes like Treasury bonds,” said Kelly Kowalski, head of investment strategy for MassMutual.
If your allocation, diversification, and foundation are in good condition, you have a better chance of weathering a market storm. Indeed, such preparation can help you maintain the financial discipline necessary to avoid making knee-jerk moves that investors often fall prey to during market downturns. (Related: 3 tips to avoid locking in investment losses)
So, take a good look at each.
Better yet, you could review each area with a financial professional who can help assess just how much a bout of market volatility might affect your financial circumstances. This could be especially useful if your finances and obligations have substantially changed since you first established your investing program.
Connect with a MassMutual financial professional
Your age versus your asset allocation
To begin with, do you know if your asset allocation is appropriate for your age?
Start by figuring out your current asset allocation.
As a reminder, asset allocation is how a portfolio is divided among investment classes with different levels of risk. This typically focuses on a mix of between stocks, bonds, and cash.
- Stocks are typically considered more risky than bonds but offer the potential for higher returns.
- Bonds are considered safer, for the most part, but usually offer less of a return in exchange for that relative safety.
- Cash is typically considered safe, but offers very little return beyond a typical bank savings interest rate.
Your overall market risk is determined by the mix of these investments. More invested in stocks? More risk. More in bonds? Less risk. (Types of stocks and bonds as well as other types of investments can affect the mix as well, as discussed below.)
- But the mix will change. Market performance can cause your allocation to drift from your targets. If stocks surge, you might end up with 70 percent in equities when you targeted 60 percent. (Important: Rebalance your asset allocation regularly)
- And the target will change. A 25-year-old in most cases should not have the same investment mix as a 55-year-old.
The logic is that younger investors can afford to take on more risk because they have more time to recover from losses. Older investors have less time to recover before having to use savings to fund their retirement.
- So, if you're in your 20s, 30s, or even early 40s, the idea is that you can afford an aggressive allocation, perhaps 80 percent stocks and 20 percent bonds and cash.
- As you move into your late 40s and 50s, your timeline to retirement gets closer. This is when many investors shift to a more moderate allocation, perhaps 50-60 percent stocks with the remainder in bonds and cash.
- In retirement, protecting what you've built becomes paramount. Some experts suggest reducing stock exposure to 20-30 percent in the years just before and after retirement, then gradually increasing it again.
So, how old are you and how does it match up with your asset allocation mix? And does it synch with your retirement plans?
“Asset allocation matters, but what matters even more is whether a portfolio is aligned with when money will actually be needed,” Vanderburg pointed out. “Time horizon and cash flow planning are what allow investors to stay disciplined during periods of stress.”
Keep in mind this caveat: For some people, it might not be about age as much as attitude: How much risk are you willing to take? (Learn more: What is your risk tolerance in investing?)
Another caveat: There are differences within categories. Not all stocks have the same level of risk. Ditto with bonds. And cash can involve currency and inflation risk. And in today’s investing world, there are investing opportunities far beyond stocks, bonds, and cash.
That’s where diversification comes in.
Are you diversified?
Along with a mix of different categories of investment, like stocks and bonds, you also want to have differentiation within those categories. That helps insulate you from a downturn in one holding or group of holdings from dragging down your entire portfolio.
Most investors are familiar with this “eggs in one basket” concept. Again, it’s a matter of periodically checking.
"Concentration amplifies volatility and drawdowns, making thoughtful position sizing and correlation awareness essential for resilient portfolios,” said Kowalski. "Preparation and diversification instill portfolio resilience and make inevitable volatility manageable and a little less uncomfortable."
Of course, diversification doesn't guarantee profits or protect against all losses, but it can help reduce the impact of a downturn. (Related: Winning with a long-term investing strategy)
So, in the face of market volatility, are your investments diversified enough to take a hit to a certain sector, the stock market, the bond market, or … heaven forbid … all markets?
On the latter concern, check your equity and debt market-based investments.
Are your stock holdings:
- Spread across different business sectors?
- Channeled into a variety of company sizes?
- Sliced a different way, divided in value stocks and growth stocks?
Ask the same question about your bonds. Are your holdings in this category a mix of:
- Corporate bonds?
- Government securities?
- Different maturity dates?
- Varied ratings?
Many investors use mutual funds and exchange-traded fund vehicles to help spread risk. But they need to be diversified as well, not only from each other, but also from other investments. For example, if a mutual fund has moved significantly into tech stocks, and you hold many of those same tech stocks in your retirement portfolio, you may be overexposed to a tech sector downturn. (Related: Understanding mutual funds and ETFs)
And there are relatively new investment vehicles that can help diversify holdings away from equity and debt markets, although they can expose investors to higher levels of risk. These can include:
Still, such investments can be indirectly tied to markets. How to avoid that?
Two more commonplace but often overlooked insurance-based options include:
Annuities. These can provide guaranteed lifetime income that doesn't fluctuate with the market.** (Learn more: 5 reasons why you may need an annuity)
Whole life insurance. Besides providing protection in the form of a future death benefit for your beneficiaries, these policies build cash value over time that you can borrow against during your lifetime without immediate taxation.* This can provide a source of funds during market downturns, allowing your invested assets time to recover. (Need to know: How to use life insurance for retirement income)
“The use of annuities and life insurance can act as a stabilizing force within a financial plan,” said Kowalski. “They can deliver contractual guarantees and predictable income streams that can help support financial stability during periods when growth assets experience greater fluctuations.”
Your financial foundation: Is it solid?
Ideally, investing should be part of an overall money management plan. So, in trying to prepare for market volatility, you should make sure that plan is still on track.
To begin with, check the math on your budget and your emergency fund. Many people looking to control their finances set these up early in their adulthood. But many also fall into the “set it then forget it” trap. Circumstances change over time and these two key pillars of money management should adjust to those changes, especially if market volatility looms close in the future. (And if you haven’t set up either, start.)
- Budget. Check your spending and your debt. And know what kind of debt may be affected by market swings and related economic downturns, typically adjustable-rate loans and credit. Will you still be able to meet your obligations if your investment balance drops? Then identify what kind of discretionary spending you can cut back on if times get tough.
- Emergency fund. Most aim for three to six months of essential expenses in a readily accessible account. If your circumstances have changed since setting the fund up (your family expanded perhaps?), then you may want to make an increase. And perhaps add a little more. This cushion can reduce the likelihood you’ll be forced to sell investments at a loss when unexpected expenses arise.
There are additional considerations for those nearing or in retirement, namely, having non-market-based revenue streams to draw upon during times of market volatility or general downturn. These can help you avoid tapping investment principal and possibly hurting your chances of riding out a market recovery. (Learn more: Sequence of returns risk)
Social Security and possibly pension income are two such avenues. And, as noted above, annuities and whole life insurance can help provide funds in retirement as well.
“Strategies like annuities and permanent life insurance can play an important role by creating stability elsewhere, which can give growth assets the time they need to recover,” said Vanderburg.
Conclusion
Preparing for market volatility isn't about predicting when the next downturn will come or trying to time the market. It's about building a financial planning approach appropriate for your age and risk tolerance, spreading risk across different asset types and vehicles, and establishing the financial cushion you need to weather storms without making panic decisions.
It is also important to keep perspective. Volatility feels worse when you're watching it daily. If you have a long-term investment horizon and a sound strategy, short-term market movements are often noise, not a signal to sell.
A financial professional can help you determine the right asset allocation for your situation, identify diversification opportunities you might have missed, and keep you focused on long-term goals when markets get choppy.
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Frequently Asked Questions about preparing for market volatility
Q: How often should I rebalance my portfolio?
A: Most financial professionals recommend reviewing your portfolio at least annually, though some investors rebalance quarterly or whenever their allocation drifts more than 5 percentage points from their target. The key is finding a schedule you'll stick with. Keep in mind that rebalancing too frequently can trigger unnecessary taxes and trading costs, while rebalancing too rarely means your risk exposure may drift significantly from your intentions. A regular annual review — perhaps tied to tax season or your birthday — can help make rebalancing a habit.
Q: How much should I allocate to annuities or permanent life insurance?
A: There's no one-size-fits-all answer. These vehicles work best as part of a diversified strategy, not as your entire portfolio. Many retirees find success by using annuities to cover essential expenses not met by Social Security and pensions while keeping some assets invested for growth and liquidity. With permanent life insurance, the "right" amount depends on your protection needs, cash value goals, and overall financial picture. A financial professional can help you determine appropriate allocations based on your specific situation, time horizon, and risk tolerance.
Q: Should I change my asset allocation when I see market volatility coming?
A: Trying to time the market — moving to cash before a downturn or jumping back into stocks at just the right moment — rarely works, even for professional investors. Market timing requires being right twice: when to get out and when to get back in. Miss the market's best days while you're on the sidelines, and your long-term returns can suffer dramatically. Instead, maintain an asset allocation appropriate for your age, risk tolerance, and goals. If current volatility is making you uncomfortable, that may signal your allocation is too aggressive for your risk tolerance, and a permanent adjustment might be warranted — not a temporary market-timing move.
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Discover more from MassMutual …
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*Access to cash values through borrowing or partial surrenders will reduce the policy's cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
**Guarantees are backed by the claims paying ability of the issuing insurance company.
