How to handle market volatility

Experienced equity and fixed income investors know that a diversified stock and bond portfolio is the key to wealth accumulation but also realize that markets don’t move in a straight line. From time-to-time, markets exhibit increased volatility. In the stock market, this can occasionally lead to market corrections (a decline of 10% or more from peak value) or even bear markets (declines of 20% or more).

Markets moved in a generally positive direction through mid-February 2025, when the benchmark S&P 500 reached an all-time high. The path to a record-setting level was certainly uneven. In October and December 2024, stocks lost ground. After recovering in January and early February, stocks reversed course. Through March 10, 2025, the S&P 500 retreated 8.6% from its peak.

“Episodes like this tell investors a lot about their tolerance for risk,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “You need to be prepared for the market’s risks, particularly when it has reached all-time highs.” Haworth notes that in 2023 and 2024, investors enjoyed significant stock market gains, particularly among large-cap growth stocks. “As a result, growth in that portion of their portfolios results in some people owning too much of that type of stock. They should consider making an adjustment,” says Haworth. “On the other end of the spectrum, some very cautious people hold too much cash and should work to more actively invest it.”

Understanding what causes market volatility may help you better manage the emotions and behaviors that come with it. Let’s explore market volatility and what can help you ride the waves, such as a comprehensive financial plan.

What is market volatility?

Stock markets sometimes experience sharp and unpredictable price movements, either down or up. These movements are often referred to as a “volatile market” and can occur over a period of days, weeks or months.

While the term “volatility” applies to both up- and-down-market movements, investors tend to be more concerned about downside volatility.

It’s important to recognize that significant, short-term changes in the market tend to be temporary. It’s also notable that volatility isn’t necessarily all bad: When markets decline, opportunities may arise to find good value in specific investments that experience a short-term drop.

What causes market volatility?

While market volatility can happen with little warning, it rarely occurs for no reason. For example, a series of events seemed to contribute to the 2022 bear market.

• Surprising economic news that differed from the expectations of investors (in this case, a sudden inflationary spike).
• A sustained change in monetary policy, as the Federal Reserve announced plans to raise short-term interest rates in response to rising inflation.
• Geopolitical events such as Russia's invasion of Ukraine, creating a range of economic impacts with ramifications for global markets.

Other factors can cause market volatility, including:

• Political developments, including unexpected election results, an event such as a government shutdown or the passage of key legislation designed to give the economy a boost.
• Events specific to markets, such as a swing in investor sentiment, company or sector earnings surprises and financing pressures. Following a major market runup in the 1990s, markets experienced significant volatility, mostly to the downside, beginning in 2000. At this point, a number of overpriced dotcom stocks faced a sudden and dramatic selloff as investors became concerned that prices had outdistanced underlying company fundamentals.

Five steps you can take during volatile markets

Because market volatility is temporary, it’s important to remain calm if your portfolio is affected. But there are also steps you can take to help you` better prepare for market turbulence.

1. Establish or revisit your financial plan.

A financial plan is “the foundation of investing,” says Eric Freedman, chief investment officer for U.S. Bank Asset Management. He emphasizes that sticking with a plan helps you avoid the urge to move money in and out of the market in reaction to price changes.

“Investors often find that market timing doesn’t result in a favorable outcome,” Freedman says.

As you create or review your plan:

• Take a close look at your financial goals and your time horizon. If they’re no longer realistic, make adjustments so you can stay on track.
• Review your monthly budget to assure you’re comfortable with your income and expenditures. You should be able to cover essential expenses at all times.
• If necessary, try to identify ways to set additional dollars aside for your most important financial goals.

2. Bolster your emergency fund.

Your emergency cash savings serve as a financial cushion during difficult times or to help you meet unexpected expenses. The conventional wisdom is that you should have the equivalent of three to six months’ worth of income readily available.

If your income fluctuates in economically challenging periods or due to the nature of your work, consider bumping up your emergency fund to meet expenses for six to nine months or more . It will provide peace of mind that you can get through challenging periods.

3. Reassess your risk tolerance level.

Your risk tolerance is one of the pillars of your investment strategy. From time to time, reexamine your views on investment risk.

• Are you willing to accept moderate losses in your investments temporarily? If you are, you could build a portfolio mix aimed at enduring more significant short-term volatility but that has the potential for higher, long-term returns.
• Do you become nervous about your portfolio during down markets? If so, you may want to choose a more conservative portfolio mix to reduce risk. For example, you may be able to take advantage of today’s higher bond yields to position more assets in bonds and manage risk by reducing equity positions.
• What is your time horizon to retirement? If you’re nearing retirement age, you may want to reduce downside risk in your portfolio to avoid any significant losses just before or once you’re in retirement. By contrast, if you’re 20 years or more away from retirement, time is on your side. You can afford to ride through the market’s challenging periods to potentially earn a higher return.

4. Make sure your portfolio is properly diversified.

A diversified portfolio that better weathers market volatility begins with owning an appropriate mix of investments aligned with your risk tolerance level. The mix of assets you hold should represent three broad investment categories: stocks, bonds and cash.

• Stocks: You might want to include small-, medium and large-cap stocks, along with international stocks. You could also include some combination of growth and value stocks, as well as specific industry sectors in your asset mix.
• Bonds: Consider government bonds, corporate bonds, and bonds of different maturities.
• Cash: Cash and cash equivalents, such as CDs and money market accounts, provide liquidity and portfolio stability.

“One advantage of the volatile period we’ve experienced in early 2025 is that investors can go back to their financial plan and re-evaluate the balance of their risk tolerance to their expected return,” says Haworth. “They can consider that we’re getting more out of fixed income than we have in years.” Bond yields today are far more attractive than they were just a few years ago.

“Investors want to be careful not to sell stocks when prices have already declined,” warns Haworth. “But if you want to temper portfolio risk, you may want to gradually transition a portion of your portfolio from stocks to bonds.”

For those who still have a sense of caution about the stock market, “a dollar-cost averaging strategy is an effective way to help mitigate the risk of short-term market volatility when you put money to work in assets that can fluctuate in value,” adds Haworth.

Reassess your portfolio at least annually. And as your portfolio rises or falls in value due to varied investment performance, you may want to rebalance it to make sure it’s still aligned with your primary objectives.

5. Talk with your financial professional.

Investors should always be prepared for market volatility. An experienced financial professional can review your current plan or guide you through the process of developing a plan to help you feel confident that you’re on track to your financial goals.

Even if you’re currently comfortable with your plan and investment portfolio, the economic environment can change quickly. A financial professional can help assess your circumstances and calibrate your plan as necessary to either help protect your financial position or take advantage of new market opportunities.

Your financial goals are the foundation of your financial plan. Learn about our goals-focused approach to wealth planning.