Money Matters: How to cope with market volatility in 2025

Jeff Witz, CFP

The markets have certainly been a roller coaster lately. After a solid start to the year, the US markets have been upended by the will-they-or-won’t-they Trump administration tariffs, sticky inflation, and interest rates unlikely to drop significantly anytime soon. This volatility is not unexpected when a stock market setting new record highs suddenly experiences significant headwinds. Economic indicators also show signs of an economic slowdown. Unemployment has been creeping up, and new hires have been trending down. However, overall, the US economy continues to look fairly strong. Despite this, the stock markets have been jumping up and down from one day to another.

For investors, it is critical not to overreact. You need to block out the surrounding noise and follow your investment strategy in the face of volatile markets. Actions based on emotion and fear can cause you to make mistakes that can harm your long-term investment performance. In 2020, I wrote an article during another period of high volatility (the COVID-19 shutdown) and provided some insights for investing in these environments.¹ I want to share those with you again:

• Fight the impulse to sell your holdings if the markets are dropping. Selling after drops can make temporary losses permanent and difficult to recover. Although it can be difficult emotionally, sticking to your investment strategy may be healthier for your portfolio. It is important to continue monitoring your investments, but remember the long-term reasons the investment is in your portfolio. What role is it playing? If it is still a good fit, holding the investment may be the better long-term strategy.

• Remember that you are investing for the long term. Markets have always fluctuated up and down, and during your lifetime, you are likely to experience several significant declines. Investors should ignore the noise and stay disciplined in their designed investment strategy, which was created specifically to avoid these pitfalls.

• Review your risk tolerance. Risk you took on years ago may no longer make sense given your current circumstances and stage of life.

• Make sure your portfolio is well diversified. Volatile markets have a way of exposing improperly diversified portfolios.

• Rebalance your portfolio. Market volatility can skew your allocation from its original target. Certain assets will be more affected by market swings and will move outside their target allocations. Rebalance your portfolio by selling positions that have become overweight in relation to the rest of your portfolio and move the proceeds to positions that have become underweight.

• If you must trade during volatile markets, there are defensive steps you can take to protect your positions. Stop orders and stop-limit orders can help shield unrealized gains or limit potential losses on an existing position.

• Consider adding defensive assets such as cash and cash equivalents, Treasury securities, and other US government bonds. These can help stabilize a portfolio when stocks are slipping.

Additionally, if you are fortunate to have excess resources, there may be opportunities to take advantage of the down market. However, it is best to proceed with caution. If you determine you can invest in a volatile environment, the best approach is to do so over a period of time. It is impossible to tell when the markets have hit their bottom. Do not try to guess and invest everything in 1 lump sum. If markets continue to decline, you could lose a significant amount. It is better to break the investment into smaller increments. If you are wrong, you are not wrong with all the money you planned to invest. This strategy is called dollar-cost averaging (DCA). With a DCA strategy, it is best to select 1 day per week or 1 day per month to invest a smaller percentage of the total amount you plan to invest. Selecting a day and sticking to it will enable you to ignore the outside noise. If markets continue to decline, you are incrementally buying on the downslope and will be in a better position when markets recover.

REFERENCE

1. Witz J. COVID-19 and market fluctuation: what you should do. Urology Times. March 24, 2020. Accessed March 20, 2025. https://www.urologytimes.com/view/covid-19-and-market-fluctuation-what-you-should-do

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