A worldwide recession. All time market highs. A global contagion. All time market highs. A foreign invasion. Are all time market highs in our future? The stock market is a wild ride. Stocks are a highly volatile asset class. They always has been. They likely always will be. So, how should one invest for volatility? How do you get to financial independence as quickly as possible while minimizing any missteps along the way?
My favorite investing strategy for volatile times (which is all the time) is pretty simple: subtract your age in years from 100. The result is the % of your portfolio you should keep in a total stock market index fund (like VTSAX). The balance (your age) should be in a total bond fund (like VBTLX).
It makes taking action (or remaining inactive) amidst volatility really simple. Is the market at all time highs? Sell some stocks and buy some bonds to rebalance and lock in your gains. Is the market crumbling around you? Sell some bonds and buy some stocks while they’re at a discount. Aim to keep your percentages within about 5% of their targets.
Selling At A Bottom Can Delay Financial Independence
One of the worst things an investor can do is sell at the bottom of a market correction/crash when emotions are high. Doing so can significantly delay the time to financial independence. Making an ill-timed sale turns a paper loss into a real one. Now, you need a correspondingly bigger increase to make up for the loss. Instead, invest for volatility so you never feel the emotional pressure to sell low.
Your Portfolio Adjusts For Risk As You Age
As you age, your portfolio will get more conservative. That’s not a bad thing, especially as you close in on needing to draw from the portfolio. But, the portion in stocks will still grow significantly, helping to ward off the insidious effects of inflation. And, this approach recognizes that human behavior, has a real effect on a portfolio’s performance.
A Variation
For more aggressive or risk tolerant investors, consider subtracting your age from 110 or even 120. You’re still investing for volatility! You’ll simply end up with a higher percentage of the portfolio in stocks (and likely a wilder ride). But, over the long haul, you can expect a higher total portfolio value because more of the portfolio is invested in growth assets (stocks).
Disclaimer: While we have a passion for providing entertaining, informational, and possibly useful articles about personal finance, we’re just random people on the internet with no formal credentials or expertise. Talk to a licensed professional advisor if you need advice.