Investing in a Volatile Market

In 2020, nothing has gone to plan. That includes the stock market. With some of the biggest dips and fastest recoveries, the unpredictable market may have rattled even seasoned investors. To a beginner, the market might look downright scary.

Brian Walsh, SoFi’s senior manager of financial planning, sat down digitally with members to talk about how to approach a volatile market, no matter a person’s experience in investing.

Walsh outlined three steps for anyone apprehensive about the market.

Step One: Assess

Before diving into the market, Walsh recommended taking a step back and assessing the overall situation. While many of us like to believe we’re immune to bias or impulse, these kinds of phenomena often end up influencing the way we invest our money—for better and for worse.

Walsh said he most commonly sees two emotions driving investment strategies: fear and greed. Fearful investors often pull money out of the market after an unexpected dip, or invest very little very conservatively, with the dread of losing it all, he said.

On the other side of the coin, greed manifests itself in a lack of fear, like investing emergency savings, shorting stocks, or seeking out risky value growth propositions.

While both of these emotions are natural, it’s important that investors don’t let them drive all their decisions.
Biases can also subconsciously guide investing behavior. Walsh outlined three of the most common biases he witnesses as a financial advisor:

•  Loss aversion. “We are naturally wired to feel more pain when we experience the loss of something than we would feel for the equivalent amount of joy,” Walsh said. For example, if you were to lose $500 in an investment, you might feel more pain than you would happiness in gaining $500. Humans just feel more when they lose than when they win, studies show. But that doesn’t mean investors who encounter a loss need to pull money out of the market immediately, or even adjust their strategy.

•  Hindsight bias. People under the spell of hindsight bias believe that after an event they accurately predicted it before it happened. For example, when a tech stock soars out of the blue, some investors will wrongfully believe that they predicted it would happen, which can lead to overconfidence in future financial endeavors. “You end up trying to predict the future based on a biased view of the past,” Walsh explained.

•  Confirmation bias. When someone wants something to happen, they’ll often seek out sources who support that belief. In today’s news-saturated landscape, it can be easy to fall into confirmation bias. “Humans naturally seek out information that supports their existing belief,” Walsh said, and that could lead investors to go full tilt on a stock because they’ve only looked for confirmation of its value, not the downsides.

•  Reference bias. Sometimes called anchoring, this is the tendency over-weigh the value of a stock or security. For instance, when a stock price dips, investors might be “anchored” to what they bought the stock for instead of its contribution to their entire portfolio right now. “It makes people more likely to hold on to losing stocks and sell their winners,” Walsh said.

With an acknowledgement of common mistakes, emotions, and biases, investors can try to use data to overcome these missteps, Walsh said.

Step Two: Understand

The average investor sees returns of only 1.9% year over year, Walsh noted. The figure is worse than the market overall because people let biases, greed, and fear drive their investment strategy, he said. This is when data can help decision-making around investing. Keep in mind:

•  The danger of market timing. Novices and pros alike may try to time the market, but moving money in and out can have some of the biggest negative effects on a portfolio, Walsh said. “Six of the best 10 investing days occurred within two weeks of the 10 worst days,” Walsh said, citing research from JPMorgan Chase from nearly 20 years of market data.

•  Time horizon. News articles about a market dive can inspire panic, but if investors don’t need their assets for some time, the dip won’t matter. That’s because volatility has less of an overall impact on investments the longer an investor’s time horizon is. The dip that seems so big today may feel like a blip 10 years from now.

•  Cash is not always king. All good investors keep cash on hand for immediate needs and emergencies, but “over the long term, cash doesn’t earn or keep pace with inflation,” Walsh said.

•  Role of diversification. Investing doesn’t have to mean putting all your eggs in one basket. Instead, spreading out funds over many baskets can reduce the effects of volatility. “Full diversification has less risk overall, since a large pool of investments won’t perform the same way,” Walsh said.

Step Three: Respond

Using data to your advantage and not letting biases and emotions get the best of you can help, but creating a framework to invest in the long run is equally important.

There’s no one right time or date for everyone to start investing. When a person is ready will vary based on their finances, Walsh said. Before diving headfirst into the market, Walsh recommended taking these actions, in order of importance:

  1. Create a safety net of one month’s worth of expenses saved.

  2. Get a match from a company-offered benefit. If an employer offers a 401(k) account match, employees should take advantage of it.

  3. Protect income with disability and life insurance.

  4. Tackle bad debt, including personal loans, or credit card bills with a 7% or higher interest rate.

  5. Build an emergency fund equal to three to six months of liquid savings. Note: some people should have an emergency fund of 12 months of expenses.

  6. Save 15% for retirement.

  7. Save for short-term goals, which could be a down payment for a first home, a vacation, or a child’s education.

  8. Pay down good debt like student loans and mortgages.

Once you’ve established some savings and conquered debt, it could be time to invest in the market. It’s also worth considering what you’re investing for, and how long you should keep money in the market, Walsh said.
Here’s where individuals might consider keeping their capital, depending on how soon they plan to use it:

•  0-3 years: savings accounts, cash, and short-term bonds. Because someone might need the money quickly, keeping it in the market isn’t ideal.

•  3-7 years: brokerage accounts, with a mix of stocks and bonds. This strategy can earn a return but may be less aggressive.

•  7+ years: brokerage accounts, mostly stocks with some bonds. Here is where investors could allocate more aggressively, since they’re likely years, not days, away from cashing out.

By prioritizing financial needs and having a firm grasp on the time horizon of investments, day-to-day volatility becomes less important in the long run.

Investing With a Guide

Investing requires money, of course, but it can really take off when people use time to their advantage. Investing regularly and as early as possible can lead to bigger gains in the long term.

But creating goals based on your unique needs can be stressful, even with data at hand.

That’s where SoFi members can get help. No matter where you are on the investment journey, you can get advice from a financial planner at no cost.

SoFi’s credentialed financial advisors are required to keep your best interests in mind—with no upselling or quotas.

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