Personal Finance | November 10, 2021

Faced with VUCA Should Noob Investors HODL?

Dear Carrie,

I'm a Marine and have just started to invest in the Thrift Savings Plan (TSP). But as a new investor, all the volatility and uncertainty in the stock market worries me. Should I stick with it?

—A Reader

Dear Reader,

You may be a noob (aka newbie) investor, but your experience in the military may actually help you in handling the VUCA (volatility, uncertainty, complexity and ambiguity) that's a normal part of investing. It's interesting to me that this military acronym has been adopted by the business community as a quick way to reference the constant change and unpredictability that seem to be intrinsic to many of today's industries. It certainly applies to the stock market!  

But just as there are strategies to handle VUCA in military situations, there are strategic ways to approach investing that help you handle the inevitable ups and downs of the stock market. Another current acronym—HODL—is a good starting point. Based on a misspelling of "hold" in a post by a harried trader, HODL refers to certain buy-and-hold strategies of bitcoin speculators. But it can apply equally to other types of investing because taking a long-term view is the key to weathering VUCA. Does that mean you have to "hang on for dear life?" Not necessarily. However, once you have a well-thought-out asset allocation plan that is diversified and matches your own goals and feelings about risk, the key is—yes—to stick with it. 

Here are my suggestions for how to mitigate VUCA. Some of them might sound familiar.

Keep your cool

Volatility is a fact of investing life that can take you on an emotional roller coaster ride. Seeing your investments go up can give you a high that leads you to chase performance, buying the current high-fliers. Seeing them go down can make your stomach churn and lead to getting out when you should hang tight. The problem isn't volatility itself, but how you react to it.

The way to keep your cool and not overreact is to have a plan. That means knowing what you're investing for (retirement? buying a home?), choosing investments that match your comfort level with risk, and resolving to keep your money working despite the inevitable declines. At times that may be boring, at times it can be exciting, and at other times terrifying. But to me, volatility isn't the biggest risk. An even bigger risk is not investing—and not reaching your goals. The best strategy to handle volatility is to "embrace the suck" as they say in the military—ignore the noise and stay invested according to your long-term plan.

Be flexible and save aggressively

Even when you have a plan, there's always some uncertainty. It's not only the market that can change; your life situation and corresponding goals can also evolve. That's why financial planning is an ongoing process, not a fixed course. To combat uncertainty, you need to be flexible enough to change your financial tactics as your needs change—while keeping your eye on your ultimate objectives.

Another key strategy is to prepare for the unexpected. Make sure you have an emergency fund with enough ready cash to cover 3-6 months essential expenses. This will give you a safe harbor and room to maneuver when something unforeseen happens. Also make sure you have the right type and amount of insurance to help protect you and the people you care about against financial calamity.

Still feeling uncertain? Save aggressively.

Consider "fire and forget" solutions

The stock market is complex and can be intimidating for a new investor, especially when it comes to choosing investments. However, you don't have to be an investing expert if you follow a few simple principles. The first is to understand that every investment carries risk. Your job is to know how much risk you're willing to take for a particular investment given your goals. The second is to spread your money across stocks, bonds, cash, and possibly real estate or commodities (your asset allocation) and make sure you're diversified, which means having a mix of investments within each of these asset classes. Mutual funds and exchange-traded funds (ETFscan make it simple to do this.

Fortunately, the lifecycle (L) funds offered in the Thrift Savings Plan (TSP) provide one of the simplest ways to invest. They're designed to give you a diversified mix of investments appropriate for your age. They also help you manage risk by automatically rebalancing in response to market conditions and as you get closer to your anticipated retirement date. For instance, if your retirement target is 2030, you'd choose L2030 and your fund would be managed accordingly. It's a kind of "fire and forget" solution. Target date funds like the TSP L funds series are also increasingly common in civilian retirement plans like 401(k)s.

Outside of the TSP, for example in an IRA or brokerage account, you can use professionally managed accounts or hire an advisor for more customized solutions so you can spend less time monitoring your investments.

Focus on what you can control

Investing can seem ambiguous because there are always unknowns. You can't predict the market. You won't always choose winners. So focus on what you can control. Save. Diversify. Keep costs low. Have a flexible plan. And don't hesitate to get financial help from a trusted advisor whenever you have questions.

Some of the very qualities Marines are known for—judgment, discipline, decisiveness, endurance—are qualities that will also help you as an investor. So, in spite of VUCA, I encourage you to stick with it. And thank you for your service.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

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