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Market Volatility Strategies for Younger Investors

Investors in their 30s and 40s may not have seen market conditions like this. Here’s how they can work with their advisers.

The recent stock market volatility tied to the coronavirus pandemic is unnerving to many investors of all ages. It’s important for financial advisers to work closely with their clients to ensure they stay on track with their financial planning and investing strategies.

Clients in their 30s and 40s who may not have experienced a downturn like this will especially need your guidance to stay on track.

Longer Time Horizon

Financial advisers should stress to their younger clients that they have a long time horizon for their investments. It's important to help clients in this age range understand that market downturns do and will occur periodically, and that it’s important for them to stay invested through these periods of volatility.

Given their age and their long time horizon for investing, they have the advantage of compound interest on their side. They also need to know the value of continuing to contribute to their 401(k) and other employer-sponsored retirement plans available to them, and adding to their taxable investments as well.

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In line with this time horizon, a market decline can be a good time to do a review of their overall financial plan to ensure it still fits their situation and that it still is aligned with their goals and risk tolerance.

Emergency Fund

This is a good time to revisit the need for an emergency fund. Many people in the 30s and 40s find themselves engrossed in priorities like building their careers and raising a family. They may ignore the need for an emergency fund. Periods of market and economic uncertainty can provide a good example of why this is so important.

If their safety net is currently underfunded, financial advisers should work with them to get it to a point that will meet their potential needs. Show them how they can add to this fund on a regular basis. Be sure they understand that liquidity and safety are more important than the returns earned on these funds.

Savings Rate

This is a great time to revisit your client’s savings rate. Given that someone in their 30s and 40s has a long time to invest, getting clients to invest even a small additional amount can pay off handsomely for them down the road. Getting them to increase their savings rates when the market is depressed can give an added boost to these added savings over time.

Are they contributing the maximum to their 401(k)? If not, even adding an additional 1% or 2% of their salary can make a big difference over time. If their employer matches, you will want to encourage your client to contribute at least enough to receive the full match.

Beyond their workplace retirement plan, this is a good time to encourage these younger clients to save and invest in IRAs (Roth or traditional) as well in taxable accounts.

Review Asset Allocations

A precipitous decline in the stock market can throw your client’s asset allocation well off target. This might be a good time to work with them to rebalance their portfolio back to their target asset allocation.

This is also a good time to review the asset allocation for these younger clients. Are they taking an appropriate amount of risk for their situation? While some may feel a level of fear about this market decline, it's important to counsel younger clients that taking an appropriate level of risk commensurate with their age and time horizon can pay off handsomely for them down the road. If you feel their investments are too conservative, this is the time to encourage them to move a bit higher on the risk scale.

As part of this process, this is a good time to review the individual investments your clients are using to make up their asset allocation. Do their current investments help position these clients for the future? The performance of an investment in a market downturn is just as important as its performance when the markets are moving higher. Have your client’s investments performed as expected during this downturn?

Overall, many of your clients in their 30s and 40s may be feeling fearful during this sudden drop in the stock market. As their adviser, this is a time to truly prove your value to them and to their futures.