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Amid the war between the United States and Iran, some young investors got their first taste of market volatility.
“An early decline can make the market feel unusually dangerous at a time when volatility is the norm in long-term investing,” said Douglas Bonepers, a certified financial planner and president and founder of Born Fied Wealth, a wealth management firm in New York City.
“They can be anxious because they haven’t yet had the experience of living through previous downturns and recoveries,” Vonepers says.
Since the Middle East war began on February 28, the S&P 500 index has fallen more than 1.7% each day and gained more than 2.5% each day, according to data from Morningstar Direct. Stocks have improved slightly since the US announced a two-week ceasefire on April 7th.
Yet, within the first month of the war, the S&P 500 fell more than 7%. An initial $10,000 investment in the index on Feb. 28 would have fallen to about $9,260 by March 29, according to Morningstar Direct calculations.
The S&P 500 wiped out losses from the Iran war, with $10,026 in investments as of Monday’s close.
Zach Teutsch, founder and managing partner of Values Added Financial, a Washington, D.C., wealth management firm, said these market fluctuations can have a significant impact on new investors.
“First experiences have a huge impact on how we are emotionally and how we see the world,” said Teutsch, a member of CNBC’s Financial Advisor Council. “It’s hard not to overlearn the first few lessons.”
According to Charles Schwab’s 2024 report, Gen Zers born between 1997 and 2012 began saving and investing at the average age of 19. By comparison, baby boomers started investing at the average age of 35.
Expected 15 bear markets during my tenure
However, the recent volatility is not unusual.
In fact, Christina Guglielmetti, CFP and president of Future Perfect Planning, an asset management firm in Brooklyn, New York, said young people can expect about 15 bear markets in their working lives. A bear market occurs when an index declines by more than 20% from its recent high.
In recent weeks, the Nasdaq and Russell 2000 have entered correction territory, dropping at least 10%, while the S&P 500 is getting closer. Everything has recovered since then.
“My clients sometimes ask me if the market will crash, and I tell them it’s not a question of if, but when,” Guglielmetti said.
Vonepers, who is also a member of CNBC’s Financial Advisor Council, said these inevitable market downturns are actually giving disciplined young investors an opportunity to buy stocks at a discount.
“Time is typically their greatest asset, and over a long investment horizon they should be expected to weather many corrections, bear markets, recessions and geopolitical shocks,” he said.
The best strategy is one that can be continued
Recent market fluctuations may have taught him something about himself as an investor, Guglielmetti said.
“There’s no substitute for experience,” she said. “You know in your head that the market is volatile, but you don’t really know how you’re going to react until you actually see the numbers going down.”
If you’ve been feeling overly anxious about your investments in the past few weeks, “a 100% stock portfolio may not be right for you, even if you’re very young,” Guglielmetti says. You may want to keep some of your money in cash, bonds, certificates of deposit, or money market funds.
He added that the best investment strategies are “those that can be sustained over the long term,” and that “if you don’t stay in the market, it’s not necessarily the strategy that will give you the best returns.”
Certainly, you don’t want to invest too conservatively and risk not meeting your financial goals, or suck money out of the market during a downturn and miss out on market recovery.
You may need to change your strategy towards short-term goals
Most people in their 20s and 30s who are investing for retirement want to keep the majority of their money in stocks, according to Bonepers. But “it is around short-term goals that a change in strategy may be necessary,” he said.
Bonepers said funds that you plan to use within the next few years, such as buying a home or going to graduate school, shouldn’t be invested as aggressively. A high-yield savings account is a smart choice for short-term funds, while a combination of cash and other conservative investments could be used to fund medium-term goals.
“Young investors can invest for multiple purposes at once, but should avoid treating every dollar the same,” Vonepers said.
