NEW YORK — US stocks are recovering after the market experienced its worst day in two years on Monday, but the average investor may still be understandably scared. Over the course of a three-day losing streak, S&OP 500 fell more than 6% before rising again on Tuesday, rising 1.6% in midday trading.
“This is what an emotion-driven market looks like,” said Mark Hackett, head of investment research at Nationwide. “You had a three-day period that was really very challenging. But the drop was not justified by the data that was out there, which is why we have a day like today.”
For everyday people, what are the best ways to deal with market volatility? The main advice is to do nothing, but ultimately your answer depends, in part, on your circumstances and financial goals.
“It is important to remember that investing in the stock market is a long game. There will be volatility, so be careful not to have a knee-jerk reaction and withdraw your money at the first sign of a dip,” said Courtney Alev, consumer advocate at CreditKarma. “Selling shares frequently or incrementally can incur fees for each transaction and they can add up quickly.”
Caleb Silver, editor-in-chief of Investopedia, echoed this, warning that sellers could also end up owing taxes on any gains.
“For everyday investors, volatility is the price you pay to invest in the stock market,” Silver said. “But it’s very disturbing when we see big declines in the market of two to three percent… It’s a little unnerving for people who have their money in 401(k)s or IRAs or retirement funds to watch this magnitude of volatility.”
Silver urged investors to remember that “a market falls into a correction, ten percent or more, once a year on average,” and that “generally the market reverts to the mean, and the average is an average annual return of eight to ten percent.” a year that goes back to the 1950s.”
For younger people just starting to invest, stock market declines are an opportunity to grow their portfolio at cheaper prices by buying when the market is falling or has fallen a lot, according to Silver.
“You are reducing the average price you pay for the bonds, stocks, mutual funds or index funds you own (when you buy in a down market),” he said. goes up again, you take advantage of the fact that you bought at cheaper prices and this adds value to your portfolio.”
In terms of selling, however, he said the best advice for most investors is to do nothing and wait for the volatility to cool.
“Whenever you invest in stocks, it’s important to be mindful of your time horizon,” Alev said. “For example, do you expect to need to liquidate in the near future? In that case, you’re probably better off opting for a less volatile and more risk-averse way to grow your money, like a high-yield savings account.”
Silver agreed.
“I don’t believe it when people say, ‘Don’t look at your 401(k),’” he said. “You should absolutely look and see what you own and see if it matches your risk appetite.”
Otherwise, you may be able to shift your investments into products that can protect you from market ups and downs or unforeseen events. Silver said high-yield savings accounts, certificates of deposit and money market accounts are currently earning returns of about 4% to 5% for the more cautious or conservative investor.
Nationwide’s Hackett said it makes sense to periodically rebalance the exposure one has in their overall portfolio – whether quarterly or annually – to ensure there is not more risk than one would like related to, for example, technology stocks or another sector. .
“If your exposures fall out of the long-term plan, align them again,” he said. Still, Hackett added that he sees the trend of technology stocks outperforming as something that could extend even further into the future.
Experts agree that for indebted investors, it is important to focus on paying off loans, especially high-interest ones, before making large investments. That being said, “if you are able to simultaneously pay off your loans and invest a little at the same time, you will effectively be paying yourself in the future by being responsible for your debt while also growing your investments over time,” Silver said.
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