Markets are responding more quickly and aggressively to new information than many people are used to seeing.
In our conversations, we’re hearing more questions like:
- What if high inflation picks back up?
- Are rate cuts actually coming?
- Is the market too concentrated in a few areas?
- What happens if geopolitical tensions increase further?
Investors today are not just managing risk, they’re also dealing with a higher level of uncertainty.
Market fluctuations are a normal part of investing and can create opportunities. At the same time, remaining invested in a strategy that doesn’t reflect your goals, time horizon, or risk tolerance can be detrimental to your retirement.
Before looking at ways to safeguard your wealth, it helps to understand the types of risks that typically come into focus during periods like this.
What Risks Should You Be Paying Attention to During Market Volatility?
Overconcentration Risk
One of the more common issues we see is overconcentration. This can show up in a few ways: holding too much company stock, having a portfolio that leans heavily toward equities, or being overly exposed to a single sector.
In strong markets, concentration may feel rewarding. But when conditions change, it can increase the impact of downturns on your overall portfolio.
At PAX Financial, we find this is often less about intentional decisions and more about positions that grew over time without being reevaluated.
How Does Sequence Risk Affect Your Portfolio?
Sequence risk refers to the timing of investment returns, especially when withdrawals are involved. As you get closer to or enter retirement, this topic becomes increasingly important.
For example, if a retiree has a $1,000,000 portfolio and plans to withdraw $50,000 annually, a 20% market decline in the first year would reduce the balance to $800,000. After taking income, the portfolio drops further to $750,000.
At that point, the portfolio would need roughly a 33% gain to return to the original $1,000,000 level. Without withdrawals, recovering from a 20% decline would require about a 25% gain. It also means the portfolio now needs to generate about a 6.7% return just to support the same $50,000 withdrawal going forward.
This is why the timing of returns, combined with withdrawals, can carry more weight than average returns alone.
What Happens When You Don’t Reevaluate Your Plan or Risk Tolerance?
Another risk that gets overlooked is failing to revisit your plan as situations change. Your risk tolerance isn’t static. It can evolve based on:
- Your stage of life
- Your income needs
- Market conditions
- Personal circumstances
In some cases, portfolios are built years earlier and continue without adjustment. During periods of uncertainty, this can lead to a disconnect between how your portfolio is positioned and how comfortable you feel with the level of risk.
What Should You Do When Markets Are Volatile and Inflation Is Rising?
Update and Stress Test Your Plan
Periods like this are when a financial plan moves from theory to something more practical. Plans that haven’t been revisited in a while only lead to more uncertainty.
Updating your plan starts with reviewing whether your current assumptions still make sense. This includes looking at all your assets, liabilities, withdrawal rate, expected expenses, and how inflation may affect your spending over time.
Stress testing becomes vital here. At PAX Financial, we use tools such as Monte Carlo simulations to evaluate how a plan may perform under different conditions.
For example, what happens if markets remain uneven for a period of time? What happens if inflation continues to affect everyday costs?
These aren’t predictions, they’re scenarios that can help you understand how your plan holds up under different conditions.
Cash Flow vs. Portfolio Value
During bull and bear markets, most people only focus on portfolio value. However, what often matters more is how your income needs are being met.
Analyze all your income sources from Social Security, pensions, business and real estate income, portfolio income, and RMDs. Looking closely at these can help determine whether your cash flow keeps up with your needs. This can provide some relief during volatile times.
A portfolio review may be needed if investments are overconcentrated or heavily tilted toward growth, as they could significantly affect your retirement income. Having a plan for where income comes from, especially during down markets, can reduce the need to make reactive decisions.
Practice Behavioral Finance Discipline
Money decisions are frequently influenced by emotion, especially during uncertain periods.
At PAX Financial Group, after working with hundreds of individuals and families through many different market environments, one thing becomes clear: people don’t make decisions based on data alone. They make decisions based on how that data feels.
During a downturn, losses can feel permanent, inflation headlines can create pressure to act quickly, and comparisons to others can increase stress. These reactions are common, but they can lead to decisions that don’t hold up over time.
One situation we see is investors panicking and moving to cash after markets decline. It may feel safer in the moment, but it introduces a new challenge: when to get back in. In some cases, that leads to missing periods of recovery.
There’s a difference between reacting and responding. Responding means stepping back, reviewing your plan, and making adjustments with intention rather than emotion.
Decisions made during uncertain periods can have longer-term effects than the market movement itself.
Building a More Resilient Retirement Plan With PAX Financial Group
With over a century of combined experience, PAX Financial Group, based in San Antonio, Texas, is passionate about helping you live your best retirement.
We can help you reassess and build a more resilient plan that includes elements like:
- A clear understanding of your income needs
- A plan for how withdrawals are funded
- Awareness of how inflation may affect your spending
- Flexibility to adjust when markets fluctuate
At PAX Financial, this type of planning is part of our process that focuses on core/satellite investing, strategic diversification, and adaptation to different stages of the economic cycle.
If you’re concerned about your investments and want a second opinion, please reach out to schedule a free, no-strings-attached conversation.
FAQs
Should I Change My Investments During Market Volatility?
This depends on your financial situation, time horizon, and income needs. In many cases, decisions during volatile periods are better made in the context of your overall plan rather than in response to short-term movements.
How Does Inflation Affect My Retirement Plan?
Inflation can erode purchasing power over time, potentially reducing how far your income goes. Reviewing spending needs and income sources can help you understand how inflation fits into your plan.
What Is Sequence Risk, and Why Does It Matter?
Sequence risk refers to the timing of investment returns, especially early in retirement. Negative returns combined with withdrawals may affect how long a portfolio lasts.
Should I Move to Cash When Markets Decline?
Moving to cash may feel safer, but it can introduce new decisions, such as when to reinvest. This may significantly impact long-term outcomes, depending on the timing and market recovery.
