How Gen Z investors can cope with stock market volatility
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In the midst of the US war with Iran, some young investors experienced market volatility for the first time.
“When volatility is a normal part of long-term investing, an early decline can make the market feel unusually dangerous,” said certified financial planner Douglas Boneparth, president and founder of Bone Fide Wealth, an asset management firm in New York City.
“This can be troubling because they don’t yet have the experience of going through previous downturns and recoveries,” Boneparth said.
Since the war in the Middle East began on Feb. 28, the S&P 500 has seen a daily decline of more than 1.7% and a daily gain of more than 2.5%, according to data from Morningstar Direct. Stocks have fared slightly better since the US announced a two-week ceasefire on April 7.
Yet in the first month of the war, the S&P 500 lost more than 7%. Morningstar Direct calculated that an initial investment of $10,000 in the index on February 28 would have fallen to about $9,260 by March 29.
The S&P 500 has now erased losses from the Iran war, pushing investment to $10,026 as of Monday’s close.
These market fluctuations can have a huge impact on new investors, said Zach Teutsch, founder and managing partner of asset management firm Values Added Financial in Washington, D.C.
“Our early experiences weigh heavily on us emotionally and in how we view the world,” said Teutsch, a member of CNBC’s Council of Financial Advisers. “It’s hard not to over-learn our first few lessons.”
Generation Z, born between 1997 and 2012, started saving and investing at the average age of 19. 2024 Charles Schwab report. By comparison, baby boomers started investing at the average age of 35.
Expect 15 bear markets during your working years
But the latest surge is nothing unusual.
In fact, young people can expect about 15 bear markets during their working years, said Cristina Guglielmetti, CFP, president of Future Perfect Planning, an asset management firm in Brooklyn, New York. A bear market occurs when an index falls 20% or more from recent highs.
In recent weeks, the Nasdaq and Russell 2000 have entered correction territory, falling at least 10%, while the S&P 500 has come close. It’s all recovered since then.
“Clients sometimes ask me if the market will crash, and I tell them it’s not a matter of if, but when,” Guglielmetti said.
Boneparth, himself a member, said these inevitable market downturns actually provide disciplined young investors with an opportunity to buy stocks at a discount. CNBC’s Council of Financial Advisors.
“Time is often their greatest asset, and they should expect to go through many corrections, bear markets, recessions and geopolitical shocks over a long investment horizon,” he said.
The best strategy is ‘the one you can stick to’
Recent market fluctuations may have taught you about yourself as an investor, Guglielmetti said.
“Nothing can replace experience,” he said. “You may know intellectually that the market is volatile, but until you see your numbers actually drop, you don’t really know how to react.”
If you’ve been overly worried about your investments for the past few weeks, “maybe a 100% stock portfolio isn’t right for you, even if you’re very young,” Guglielmetti said. You may want to keep some of your money in cash, bonds, certificates of deposit, or money market funds.
While the best investment strategy “is one that you can stick with over time,” he added, “if you can’t stay in the market, it may not be the one that will give you the highest returns.”
Rest assured, you don’t want Invest too cautiously and you risk falling behind your financial goals or missing out on a market recovery by taking money out of the market during a downturn.
Strategy may also need to change for short-term goals
Boneparth said most people in their 20s and 30s who invest for retirement want to keep the lion’s share of their money in stocks. But “where strategy may need to change is around near-term goals,” he said.
Money you expect to use in the next few years to buy a home or pursue graduate school, for example, shouldn’t be invested so aggressively, Boneparth said. A high-yield savings account can be a smart option for short-term money, while funds aimed at medium-term goals may also be preferred. A mix of cash and other conservative investments.
“Young investors can invest in multiple goals at once, but they should avoid treating all dollars the same,” Boneparth said.
