Investing Essentials Worried about the markets? How to think about your investments in the short, medium and long term

Staying calm during market volatility is easier said than done – and questioning whether you should make changes to your investments is completely understandable. The answer? It depends.

As an investor, you want to make sure your investments align with your goals. And you don’t necessarily want to make changes on the back of short-term volatility for your long-term goals, because – while the markets may have some turbulence for one, two or even six months – they are unlikely to be that way forever. That’s why it’s important to have frameworks for how to think and how to act to help you achieve your goals in the short, medium, and long term.

For short-term goals, have cash on hand

How much? It depends on your monthly expenses. Evaluate what’s essential (or fixed) versus what’s discretionary (or variable), and see if you could lower or cut some of the latter. Make sure you have enough cash to support your essential expenses – especially for a period of time that makes you comfortable, with three to six months’ worth as a good benchmark.

Tapping into your investments for short-term cash needs may not be the appropriate option to consider. Think about other sources of liquidity, and beware of mental accounting. For example, if you have cash set aside to make a big purchase, then that money may be better repurposed for current expenses if you need it more urgently.

If you do have to tap into your investments, make sure you understand the rules, potential fees and restrictions around each type of account.

For medium-term goals, focus on your risk

“For money you need three to five years from now, it’s about balance. Rates have moved higher so cash-like investments are yielding more income, while equities can potentially provide higher return through capital appreciation,” says Samantha Azzarello, Strategist at J.P. Morgan. “A balance of equities, which will likely grow over this time period and income from other types of investments might be the ideal mix.” 

If you’re thinking of making a change to your portfolio, it’s important to frame the decision around three key risk concepts: risk required, risk capacity and risk tolerance.

First, how much risk is required for the goal you’re investing for? To reach your mid- to long-term goals, and for retirement in particular, your plan may count on you staying invested.

Then, what is your capacity to take on risk? Can you actually expose your money to uncertainty in the short run in order to achieve the benefits in the mid to long run? Be honest with yourself about when you need the money and how much you need to have. In doing so, you may realize you need to pare back some risk to meet shorter-term goals.

For example, if you were investing for a down payment on a house in a few years, do you need to adjust the risk across your investments to make your portfolio more conservative and less volatile? Or could you defer that home purchase to increase the chances of meeting your goal?

Lastly, how comfortable are you with risk? It’s important to be empathetic toward yourself and understand how you tolerate taking risks with your investments.

If you have a portfolio that’s managed for you and it’s aligned with the risk levels that are right for you, then you might not need to do anything. If you’re managing your own portfolio, then use market volatility as an opportunity to check in on your risk level to see if it’s in line with the market swings. 

“Market lows often result in emotional decision making – and if you sell on the bad days, you’ll likely miss the good days,” says Azzarello. “I always say, ‘rain and rainbows.’ The worst and best markets days are just like that. They tend to cluster together.”

For long-term goals, think time in the market – not market timing

“Remember over the long run we spend more time with the economy growing and innovating, and the market generally moving higher than not,” says Azzarello. “If you have money invested for long-term goals – more than five or 10 years away – and your risk is in line with your tolerance and goals, then you might not need to do anything with your investments.”

The more time you have from your goal, the more time you have to recover and rebound from the market’s ups and downs. Experiencing volatility is a part of the process for getting you to your long-term goals.