As a generation that has already witnessed stock market booms and busts, now is the perfect time for Gen Xers, those born between 1967 and 1982, to understand the value of discipline and investment planning. Given the probability of continued market volatility and economic uncertainty, now may be the right time to adopt a more conservative lifestyle by deferring large purchases. 

This blog will explore the rationale behind holding off on large expenditures and increasing savings until the current market volatility is behind us.

Read our newest Quick Guide, “It’s Time for Investors to Put Assets on the Sidelines Back to Work.”

Why Hold Off on Major Purchases During Volatile Markets?

Making significant financial decisions or major discretionary purchases during market volatility can produce unforeseen circumstances.  It might feel right, but the unseen risks can profoundly impact your short and long-term financial stability.

1. In volatile markets, there’s often a domino effect that may influence various sectors of the economy. Your investments and job might be affected, leading to uncertainty for your financial future. Making a significant, discretionary purchase during such times could put unnecessary pressure on your financial situation.
2. When the markets are turbulent, your investments might not perform as expected. Using savings to make a large purchase could further decrease your financial flexibility, exposing you to unforeseen challenges.
3. Volatile markets can present investment opportunities for those with the discipline, means, and risk tolerance to take advantage of them. A big cash purchase will reduce your liquidity and could cause you to miss out on a unique investment opportunity. 
4. In general, interest rates will rise with inflation. If you’re financing a major purchase, rising rates can increase your cost of borrowing. Waiting for a more stable environment may lead to more favorable terms.

Impact on Your Savings

The decision to make a significant purchase during periods of market volatility can have several  impacts on your savings, such as:

• Erosion of Your Emergency Funds: Dipping into savings for a major purchase might leave you with insufficient emergency funds during a volatile period. This lack of a financial buffer can expose you to increased risks, particularly unexpected ones.

• Compromised Retirement Goals: A significant purchase might delay or even derail your retirement plans if your taxable savings are also part of your retirement nest egg. The compounding effect of savings can be powerful, and interruptions to that process can have long-term consequences.

Fortunes are Made in Downturns

History has shown that fortunes can be made when markets are down for investors disciplined enough to take advantage of them. While an initial instinct might be to sell during turbulent times, savvy investors recognize the buying opportunities presented to them.  

This principle holds for Gen Xers who understand that market fluctuations are an inherent part of an investment journey that may last 60 or 70 years. Any one year does not matter that much. What does matter is capitalizing on these fluctuations in ways that help you achieve your long-term financial goals.

Strategic 401(k) Contribution Increases

As a fee-only financial advisor in Greeneville, TN,  I’ve encouraged individuals to consider increasing their 401(k) contributions, even temporarily. The power of compounding works wonders, especially when consistent contributions are made during market downturns. 

You can benefit from the market’s eventual recovery by allocating more funds toward your 401(k) during market downturns. This is consistent with the conventional wisdom of buying when prices are lower. The 2023 contribution limit is $22,500, or $30,000 if age 50 or older. This strategy sets the stage for future financial security and demonstrates your commitment to navigating economic uncertainties with a long-term perspective.

Minimize Cash and Capitalize on  Investment Opportunities

The conventional wisdom of maintaining a substantial cash reserve for emergencies is being reevaluated in the face of inflation. Because inflation can erode the purchasing power of cash over time, there may be more effective strategies than simply converting your portfolio into a substantial cash position.  

Instead, consider investing part of your cash position in today’s fluctuating market. While investing during uncertain times may seem counterintuitive, as noted earlier in this article, prices are also lower, setting the stage for improved investment performance. You can reap substantial rewards when markets rebound by allocating a portion of your cash reserves towards carefully selected investments.

Crypto and Digital Assets: A Diversification Avenue

Digital assets and cryptocurrencies have become intriguing diversification options in modern investment theory. As a forward-thinking financial advisor, I am crypto-friendly and believe these assets can play an important role in a diversified portfolio. 

While inherently volatile, cryptocurrencies offer an alternative investment avenue that can help mitigate the risk of other investments. However, it’s essential to approach digital assets with a well-researched and informed perspective, considering their unique characteristics and potential volatility.

Bear Market Investment Strategies
Navigating a bear market requires strategic thinking and proactive planning. Here are a few actionable steps for your consideration:

• Don’t Quit: The temptation to withdraw entirely from the market during a downturn can be strong, but history has shown that staying the course can yield positive outcomes over the long term.

• Minimize Withdrawals: Minimizing or even suspending withdrawals from your portfolio allows your investments to recover more quickly when the markets eventually rebound.

• Increase 401(k) Contributions: Increasing your 401(k) contributions can capitalize on lower investment prices, setting the stage for potential growth when conditions improve.

• Maximize IRA/Roth Contributions: Take advantage of the annual limits for IRA and Roth contributions. These tax-advantaged accounts can be an important investment opportunity when markets are down.

• Update Your Financial Plan: A comprehensive financial plan tailored to your individual goals and risk tolerance is essential. If you don’t have a plan you are comfortable with, now could be an excellent time to establish one.

Inflation and Rising Interest Rates

Understanding the impact of inflation and rising interest rates is vital to the success of your long-term financial strategy.

During periods of high inflation, cash, CDs, bonds, and fixed annuities lose purchasing power. Consider changing your asset allocation into investments that have the potential to outpace inflation.

If you hold variable-rate debt, such as adjustable-rate mortgages or variable-rate loans, consider paying off or paying down this debt before interest rates increase.

Consider Sapiat Asset Management

In today’s world, even people with good incomes and savings disciplines often find themselves mired down by continuous financial stress.  It could be due to high taxes, having too much debt, or the various expenses associated with maintaining a comfortable lifestyle.

At Sapiat, balancing your finances and living life to its fullest can be complicated. That is why we are here. Anyone can pursue financial freedom if they want it bad enough.  Is it easy to achieve? For most people, the answer is no.  Does it require some hard work and discipline?  For most people, the answer is yes. Is discipline fun? Probably not, but it helps to have a well-thought-out plan to guide you. 

Instead of feeling stressed, imagine feeling organized and confident about your financial future. Talk with our team about how we can help you build a sustainable financial plan to pursue financial independence in various market conditions.