Can You Be Proactive in Times of Market Volatility?

MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.

Today the topic is volatility. Remember, volatility can be up or down. But nobody minds when the market's volatile and going up. Down is another story—especially when the downturn is so severe that people are discussing a bear market.[1] As a reminder, that's when the stock market drops 20% from a recent high.

Historically, the U.S. stock market has always bounced back—usually within a few years. And bull markets have always lasted longer than bear markets. But looking at past bear markets on a chart in a textbook is one thing, but when we're going through a bear market, it hurts because of a condition almost all of us have known as loss aversion. 

That's where we feel the pain of a loss more than the joy from an equal gain. In other words, the pain of losing $100 is more powerful than the positive feeling of making $100. Most of us, when we feel pain, we want to make it stop. We feel that we must do something. It's like the saying goes: "Action is the antidote to anxiety." In other words, taking an action makes us feel better. 

In a bear market, this feeling can cause panic selling to "stop the bleeding." We do this even if selling doesn't fit with our long-term financial goals. 

Now most of what I just said, you've probably heard before. You may have even heard it on this podcast. But for some investors, right now, this bout of market volatility feels different. And they feel worse.

Those feelings are real and are probably driven by something called ambiguity aversion. This is different from loss aversion and how we often think of risk. Ambiguity aversion is about how we don't like unknown probabilities or probability ranges.[2] And at least one study has found that most Americans are ambiguity-averse. Which is not exactly surprising. 

One expert in this field gave me an example of ambiguity aversion.² Suppose you need a medical procedure. In one scenario, the doctor says it has a 70% success rate. In a second scenario, the doctor says it's between a 60 and 80% success rate. Most people dislike the second scenario more than the first. We tend to not like uncertainties in probabilities.²

By the way, the dislike of ambiguity isn't limited to humans, either. In research on chimpanzees and bonobos, scientists found that our close animal relatives also dislike ambiguous options.[3] So this aversion seems to have deep roots in our evolutionary journey. 

I'm bringing up ambiguity aversion on this show, which is airing in the spring of 2025, because the level of policy uncertainty is extremely high compared to historical norms. And we've heard from many investors here that this time feels different.

So what I'm going to do is not analyze Washington. You can get that from our WashingtonWise podcast. And I'm not going to analyze the details of the stock and bond markets. You can get that from our On Investing podcast.

What I'm going to be doing is bringing in my guest, Susan Hirshman. And I hope our conversation will offer some productive ways to think about your financial decision-making now and some concrete steps that you can take.

Susan Hirshman is a director of wealth management for Schwab Wealth Advisory and the Schwab Center for Financial Research. She's also a Chartered Financial Analyst®, a CERTIFIED FINANCIAL PLANNER®, and a Certified Public Accountant and has worked for many years as an advisor to high-net-worth and ultra-high-net-worth investors.

MARK: So Susan, welcome to the show.

SUSAN: Thank you, Mark. Glad to be hear.

MARK: So we're going to be talking about market volatility, and it's something that especially experienced investors, at some level they know to expect it, and yet inevitably when it happens, it can feel deeply unsettling. And so you've worked with individuals for decades. Why do market downturns provoke such strong emotional reactions even when you're an experienced investor?

SUSAN: Mark, we are all human, and it's just the way our brains are wired. So part of our brains, what's called the limbic system, it still thinks we're cavemen, and it's really much in tune to the fight-or-flight response to perceived threats. 

Our brains, they think market volatility is like a T-Rex coming at us. So in these cases, our limbic system takes over. And it's very easy for us to have those unconscious, reactive, and impulsive actions.

MARK: So let's get into some of the details about some strategies. But before we do that though, can you talk about some of the key facts about, let's say, bear markets and market corrections? What are some of the most important things that you think people should understand before they start thinking about what exactly they should be doing?

SUSAN: I love that question because I think it's so important to really focus on what has happened in the past. Because oftentimes we feel that this time is different, but what we realize over time when we look back in history, there's a cycle to this. And so the first thing is that volatility is normal. An average drawdown is around 14% annually, meaning the market's gonna go down at some point around 14%. But it comes back, and it's typically gonna finish, at year-end, positive. 

And also when you look at what did history tell us? So let's look back to our most recent one, which was COVID-19. When we look back to the COVID-19 pandemic, we see that the S&P 500 fell in value by 34%. But the S&P then bounced back to its previous highs by November of 2020. So that was eight months. So it took us eight months to fully recover, and then it had a gain of over 15% by year end.

MARK: So at some level, step one in this process is going to be acknowledging your feelings, acknowledging your biases. Once you get past that, what are some of the more practical steps that people can take to, let's say, regain a sense of control and to keep their investing plans on track?

SUSAN: So we just talked about facts about the markets. What you need to focus on is facts about you. So the first thing is you have to revisit your plan, right? 

Confirm your goals, both the dollar amount and the timing and really say to yourself, "Am I able to achieve my long-term goals?" If no, then ask, "What actions can I take today to ensure that I achieve my long-term goals?" Perhaps you reduce spending. Perhaps you don't go on that trip, and you extend it to next year, or perhaps you extend your goals a year out or so. 

If you can meet your goals, then take a deep breath, but also consider is your portfolio aligned with your true risk tolerance? If this market volatility has been causing you to lose sleep, are you positioned correctly? Perhaps you need to take a little bit more conservative approach where, when markets do go down, perhaps they don't go down as much. 

When we're in up markets, everyone has an aggressive, ra-ha risk tolerance, but down markets are really when you find out what your true risk tolerance is. We need to sleep at night. Remember that. 

And then what is my short-term liquidity needs? When we're in a period of downside volatility, what we want to hope to avoid as much as possible is selling assets at a low to meet current needs. And that's why we say it's always so important to have an emergency fund. And we always have a small allocation of cash in our asset allocations to meet the needs during these types of periods. 

And then if you have to sell assets, be as strategic as possible. You want to maximize your tax situation and your potential for future growth in a market recovery.

MARK: A lot of great advice there, Susan. Nevertheless, when everything feels uncertain, some investors, they're going to feel that pull to just kind of pull money out of the market and just say, you know, "I hear what you're saying, I'm going to sell some things, I'm just going to wait until things are normal and things will calm down, and then I'm going to jump back in." 

So what's the risk in making that kind of, let's call it, an emotional-driven shift to cash or even if they, just from a tactical standpoint, they feel that the opportunity is going to be better down the road? Why take some risk right now when things are so uncertain? What are your thoughts on that?

SUSAN: Yeah, first I have to ask you, Mark, has my mother been calling you? So I get that call every day. And so this is what I say to her. Timing the market, when we try and time the market, get out and get in, it requires being right twice. 

And so when we look back, I'm sure like we both been working for a while again, in 2008, when we look back and we saw those people who panicked over their losses, and then they sold at the bottom of the market, many of them did not buy in again until the investments were well on their way to recovery. So what happens is you essentially lock in losses and you miss out on gains. 

That's problem one. And then when we look at history, right, from 1995 to 2024, take that period of time. What we found, it's so fascinating, is that 78% of the stock market's best days have occurred during a bear market or during the first two months of a bull market. And then if you missed the market's 10 best days over the last 30 years, your returns would have been cut by almost half. 

And so it's really important to understand what the ramifications of getting out and getting in are. And then what I like to tell people is that when thinking about this, one, there's always a tax cost, and how much and is it worth the tax cost of selling out? 

And then secondly, to gain back a sense of control again, I love to ask people, what's your why? Why are you investing? Connecting to that "why" about accomplishing goals, having a future for your loved ones versus just performance, can really settle you and help you understand that what I'm trying to do is invest for long term, and the short term I will get past.

MARK: Susan, at any given point in time in the markets, it's usually a … kind of a grab bag of risks and opportunities. And one of the things that you've mentioned to me in the past is that even in the midst of the down market, there some opportunities that investors can take advantage of to help improve their situation. So I was hoping you would go through that list for a little bit.

SUSAN: Yeah, sometimes I really do like down markets. I hate to say it. And one of the reasons why I do like them in a way is for clients that have large IRAs and are interested in doing Roth conversions. 

So Roth conversion, as many of you may know, when you convert an IRA to a Roth IRA, you have to pay current income tax. So the goal is to try and convert when the markets are down, so you have a lower value and a lower tax liability. And then you have it in a Roth, and all that growth that grows from the recovery is tax free. And Roth IRAs again are not subject to RMDs. So what you're doing is taking advantage of a down market to enhance your overall after-tax wealth in the long term. It's really awesome. Another is tax-loss harvesting. 

Again, we know the pain of seeing losses is hard, but what happens if you're selling your home, and you're selling it at a price that's above the exemption amounts? Perhaps gather some of those losses to negate against the gain of your home. Again, what you're doing is saving on taxes. 

Another thought is for people who are going to be subject to the estate tax. So complex or strategic gifting strategies. One is a GRAT, a grantor retained annuity trust. And what you're doing there is that you're transferring future appreciation to your family as a gift. And so doing it at a low value, right? So you transfer it at a low value, and all that future appreciation from the recovery is gifted to your heirs, estate- and gift tax-free. It's a really great tool to use. 

And then lastly, I'll use one that affects a lot of us. And that's our required minimum distributions. So required minimum distributions, they are based on the prior year end. And so for this year, they're based on 12/31 and the value of it. So it may be higher than what your current market condition may look like. And so what that says to me is I'm paying tax today on a high amount. 

So perhaps if I do have charitable intent, perhaps instead of doing just an RMD, I can do what is called a qualified charitable distribution. And again, why I'm doing that is so I can lower my current tax burden. So down markets in essence can be a great tax savings if you think of it strategically.

MARK: And I'm glad you mentioned that last one about the RMDs because it kind of brings to the mind, brings to my mind at least, that not everybody's in the same situation. For somebody in their 20s, these declines are not a big deal if you've got a 40-year time horizon. 

On the other hand, if you're a retiree or someone near retirement or someone who's actively needing to pull money out of their portfolio, it's kind of a different story. The challenges are greater there. So what's your advice for those people? What should they be thinking about?

SUSAN: Two things, cashflow and your plan. So number one, let's go back to the plan. What is our cashflow? What am I getting from Social Security, pensions, interest, and dividends, right? How much of that is coming in? What are my expenses? And can I reduce my expenses currently if I need to? And it's just a balance. 

So perhaps you put off this vacation to two years from now or a year from now. And it's just looking at how are my current expenses matching up to my cash flow? And then when we need to get some income or some cash out of our portfolio, let's look to the stable assets first, right? Let's look to our fixed income. Let's look to our cash so that we give our equity investments an opportunity to recover.

So we want to avoid as much as possible selling those equities in a downturn. And if we have to sell some equities, let's be really strategic about what equities we're selling. Again, ask yourself, would I buy this investment today? A lot of times people are holding on to investments that they just had for a long time, but really don't even like the stock anymore. It's just inertia that keeps them holding on to it.

And again, spending is just essential, and perhaps are you helping your children? So sometimes you have to put yourself first, and perhaps taking a step back from your gifting strategy and really focus on me.

MARK: Susan, what about rebalancing? That's certainly something we talk about, we swap talk about from time to time. When does it help? When might it be counterproductive?

SUSAN: You know, I think rebalancing, the more you can make it systematic, the better it is. So what do I mean by that? Is just really having a disciplined plan because the markets can go down. They can go up in a day. But if we do it on, let's say, a quarterly basis or semi-annually, whatever feels comfortable to you, that way it takes the emotion out of the situation.

If you feel for some reason that your portfolio currently is really beyond your risk tolerance, I mean, that's what happened when markets go up a lot, right? Your portfolio gets above your risk tolerance, but you don't realize it. Keeping it systematic is the key.

MARK: Maybe let's spend some time going through a more comprehensive list of some of the behavioral biases that surface particularly during volatile market times.

SUSAN: Yeah, one of my favorite ones is action bias. It favors action over inaction. Like you just feel like you have to do something because the market feels chaotic. And so instead of thinking rationally, you just take a step because it feels better to take a step. 

Or the other side of it also is just purely inaction, is keeping your head in the sand and just ignoring everything, which may be great but maybe not be as we talked about because maybe you need to adjust some things, or maybe you have opportunities to take, and you're missing out on those opportunities. So action bias is one.

And two that are really prevalent amid market volatility are loss aversion and recency bias. Loss aversion, I think we all feel it. Losses are just uncomfortable, and behavioral scientists have proven that people feel the pain of loss much more deeply than the joy of gain. And then secondly is recency bias. And that's really placing too much emphasis on what's going on today.

For example, Mark and I have both been in the markets for a while, and intellectually, people like us, we know that market events happen, and then we know markets recover. 

But right now, for many of us, we forget about the recovery aspect, and we just focus on that downside volatilty aspect. And then unfortunately take actions that are not in our best interest. Herding is what we're seeing currently, right? It's the animal spirits, it's following the crowd, it's saying, well, everyone's selling right now, or everyone in my neighborhood is selling, I better get out of the market because I don't want to be left behind.

And then confirmation bias is what our news right now is excellent at doing, and that is focusing on affirming people's fears. And so really what you listen for is things that affirm your opinion, not looking at the whole picture.

MARK: I want to go back to recency bias for a second. Certainly, again, I think we all know intuitively just because something has happened recently, that doesn't mean it's going to happen through the end of time. And yet, it's really, really hard to resist. 

So tell me a little bit about some techniques that you found to be successful to help. Maybe not cure it because we're all human, but maybe to combat it and maybe blunt its impact a little bit.

SUSAN: One is to put yourself on a media diet, right? And really don't watch the news all the time. Don't look at your statement every five minutes, right? So let's take a step back and take a breath. That's one aspect of it. The second aspect, again, I'm gonna sound like a broken record, but it's going back to my plan.

Will I be able to achieve my goals? Because that's why we're investing. We're not investing to maximize the most money we can ever make in the world. Money is a tool to achieve what's important to us.

MARK: Susan, you also mentioned herding bias. I wanted to spend a little bit of time on that because, again, I think with the rational part of our brains, we know that at some level, every good advice is personalized advice, right? It's kind of customized to our circumstances, and yet herding is almost the opposite of that. 

So could you talk a little bit about that? And again, are there steps people can take to maybe not cure the issue, but to at least mitigate it to a certain extent?

SUSAN: You know, again, I'm going to go back to our childhood, Mark. Did your mother say, "Just because everyone's jumping off the bridge doesn't mean you have to jump off the bridge?" And it's the same thing with herding, right? Just because you maybe feel people are around you are doing that behavior, it doesn't mean you should. 

And exactly what you said, personal finance, the reason it's called personal is because it is extremely personal. Right? What somebody's risk tolerance is not your risk tolerance. What somebody's cash flow is not your cash flow. What somebody's goals are not your goals. So really take a step back again and consider what is right for me. So it's really asking yourself reflective questions. 

And with all these biases, you know, if they're hard for you to manage, if it's hard for you to feel confident in this market or feel control in this market, it may be helpful to have a third party. And that's why a lot of people use advisors or have an advisor. 

An advisor is a sounding board. They try and give you these facts to take you away a little bit from the emotion. They remind you of what your plan is. So if you feel that need, perhaps it may be time, if you're not already, to work with an advisor, or if you have one and you haven't reached out, reach out to your advisor.

MARK: You mentioned … the couple of times you've actually mentioned kind of going back to your plan, and typically a good financial plan is covering both what's going on with your portfolio but also what's going on with the non-portfolio aspects of your financial life. So kind of in the spirit of this "control what you can control" kind of mindset, what are some non-portfolio-type actions people can take to improve their situation?

SUSAN: You know, I'm so glad you asked me that because people get so stressed out about a 10% market drop, a 15% market drop. But what they don't get stressed out, which they should, is really how can being unprepared for the unexpected really cause damage to not only your portfolio, but to your family. 

And so in times like this, again, going back to "control what you can control," we really encourage people to take a step back and say, you know, "Are my documents in order? Does my family know what it is that I want, need, and have to have in case of incapacity? Are the right people in place? Do they know that they are the people that are going to step into my shoes? Do other family members know that these people are gonna step into my shoes?" 

The goal is, for most people, the legacy that I see people wanting to leave is family harmony. And without having these conversations, without having your documents in order, you're leaving your family in a situation often of chaos. And market dips 10%, OK, a little chaotic, your family fighting, not knowing what to do, not knowing what decisions to make for your healthcare, to me, that's a risk that is really avoidable. And if we manage it, really a gift to our overall family.

MARK: Susan, last question for you. And we've been talking mostly about people who are maybe overreacting or prone to action or feel they need to do something. But there's also a lot of investors out there who in the face of volatility, in the face of uncertainty, their initial reaction is to just kind of get frozen, and they get anxious. 

They don't know what to do. They just don't do anything and kind of just shrink away from the situation. So what are some thoughtful steps and things they can do to, let's say, regain confidence and start making some decisions without getting too caught up in the situation?

SUSAN: Yeah, number one again is the media diet, right? Because oftentimes the constant noise in your head is what's leading to the feeling of frozen. The second is to, I hate to sound like a broken record, but go back to your plan and see, you know, am I good? Because a lot of times you are, and then you can feel such relief. 

You know, oftentimes people do not look at things because they get like, "I don't want the bad news." But if they actually look at it and see, you know, it's not as bad as I thought, or I'm in a much better position than I thought, that feeling of control, that feeling of lightness comes in, and then you're much more able to make rational decisions. 

And what I say now is by looking at your situation today, you have choice. You have options. Without looking and putting your head in the sand, so to speak, you're limiting your options in the long term.

MARK: Ignorance is bliss, but only temporarily. Reality will eventually intrude one way or the other, right?

SUSAN: Ask my scale.

MARK: All right, we will end on that note. Susan Hirshman is a director of wealth management at the Schwab Center for Financial Research and Schwab Wealth Advisory. Susan, thanks for being here today.

MARK: It's time for us to wrap it up, but one more thought before I go. As I was listening to Susan, I was thinking about how—when our situation changes, and it feels more tenuous and causes fear or anxiety—the urge to do something is a real thing. What's worse, we can't be sure about our probability of success. There's that ambiguity aversion again. Which adds another level of anxiety and doubt. 

It's like when you're driving and you run into a lot of fog. The knee-jerk reaction is to turn on your high beams. But they make matters worse. They just cause glare and reduce visibility. The best thing to do is to slow down and turn on your fog lights or low beams.[4] The slowdown part is especially important, and it's the same with financial decisions when the markets are volatile.

Like Susan said, the thing that some people want to do is the big, dramatic move that seems like it will counter the big market move. But that may be the wrong thing to do, especially in the face of a lot of uncertainty. Instead, slow down. Take the time to analyze your situation and then proceed.

That's it for this episode and thanks for listening. I'll be back in a couple of weeks with another show. In the meantime, if you'd like to hear more from me, you can follow me on my LinkedIn page or at X @MarkRiepe. That's M-A-R-K-R-I-E-P-E.

And if you like the show, we'd be grateful for a rating or review on Apple Podcasts or comment on the show if you listen to it via Spotify. We always like new listeners, and if you know someone who might like the show, please tell them about it and how they can follow us for free in their favorite podcasting app. Personal recommendations are especially effective.

For important disclosures, see the show notes and schwab.com/FinancialDecoder.

[1]Schwab Center for Financial Research, "Bear Market: Now What?" Schwab.com, April 7, 2025, https://www.schwab.com/learn/story/bear-market-now-what

[2] "Shachar Kariv on Ambiguity Aversion, Revealed Preferences, and Big Data," Journal of Financial Planning, May 2018, fpajournal.org

[3] Rosati, Alexandra G. and Hare, Brian, "Cimpanzees and Bonobos Distinguish Between Risk and Ambiguity," Biology Letters, published online November 24, 2010

[4] "Driving in Fog," National Weather Service, weather.gov, accessed April 18, 2025, https://www.weather.gov/safety/fog-driving