Janice R. Andrews
The market had its worst day in two years on Monday, and although U.S. stocks are recovering, the typical investor may still be justifiably alarmed. The S&P 500 fell more than 6% over a three-day losing run, but it recovered Tuesday, rising 1.6% during lunchtime trade.
Head of Nationwide’s investing research Mark Hackett described an emotionally charged market like this. “Those three days were really difficult for you. However, the evidence available did not support the decline, which is why you ended up with a day like today.
What are the greatest strategies for common people to deal with market volatility? The best course of action is to take no action; nevertheless, how you respond will ultimately depend on your situation and financial objectives.
General Actions to Take
It’s critical to keep in mind that stock market investment is a lengthy game. There will be volatility, so avoid making snap decisions and taking money out of your investments the moment there’s a dip, according to CreditKarma consumer advocate Courtney Alev. “There may be expenses associated with selling equities on a regular or incremental basis, and those can mount up quickly.”
This was also mentioned by Caleb Silver, head editor of Investopedia, who issued a warning to sellers that they could have to pay taxes on any profits.
According to Silver, “volatility is the price you pay to be an everyday investor in the stock market.” However, significant market declines of two to three percent are quite concerning. Those who have money invested in retirement accounts, 401(k)s, or IRAs may find it unsettling to witness such extreme volatility.
Silver reminded investors that “the market reverts to the mean, and the mean is an average annual return of eight to ten percent a year going all the way back to the 1950s” and that “a market falls into a correction, ten percent or more, once a year on average.”
Advice for Novice or Young Investors
According to Silver, stock market dips provide younger investors with an opportunity to add to their portfolio at a lower cost by entering the market while it is down or has already declined significantly.
When you purchase equities, stocks, mutual funds, or index funds during a bear market, you’re decreasing the average price you pay for those assets, he explained. Thus, you benefit from having purchased at lower prices when the market itself returns to the mean and rises once again, increasing the value of your portfolio.
However, when it comes to selling, he stated that the majority of investors would be better off doing nothing and waiting for the volatility to subside.
What to Do When Retirement Is Approaching
“When investing in stocks, it’s critical to consider your time horizon,” Alev said. Do you anticipate, for example, having to liquidate anytime soon? In such scenario, you would be better served by choosing a less erratic and more risk-averse method of investing, like a high-yield savings account.
Silver concurred.
“I find it hard to believe those who tell you not to look at your 401(k),” he remarked. “It is imperative that you examine your possessions and determine whether they align with your risk tolerance.”
If not, you might shift your money to investments in goods that will protect you against market fluctuations or unanticipated circumstances. For the more circumspect or conservative investor, Silver stated that High Yield Savings Accounts, Certificates of Deposit, and money market accounts are now yielding yields of around 4% to 5%.
According to Hackett from Nationwide, it makes sense to periodically rebalance one’s portfolio’s overall exposure, whether on a quarterly or annual basis, to ensure that there isn’t more risk than one would desire in relation to equities in other sectors or, for example, technology.
Get your exposures back in line with your long-term goal if they start to deviate from it, he said. Nevertheless, Hackett continued, expressing his belief that the outperformance trend in tech equities might continue into the future.
Actions to Take in Case of Debt
Experts concur that before making significant investments, debt-ridden investors should prioritize paying off their debt, particularly any high-interest debt. Nevertheless, Silver stated, “you are effectively paying your future self for being responsible about your debt while growing your investments over time if you are able to simultaneously pay off your loans and invest a little at the same time.”
Final Thoughts
Although it might be frightening, market volatility is a necessary component of investment. You can steer through difficult circumstances with educated judgments if you know your financial objectives, risk tolerance, and time horizon. The secret is to remain knowledgeable and refrain from making snap decisions, whether you’re a youthful investor hoping to take advantage of cheaper pricing, an older investor seeking stability as you approach retirement, or a portfolio manager managing debt. Recall that investing is a long-term endeavor, and persistence usually pays off.
