How to invest when the market is volatile
Photo by Anne Nygård on Unsplash
U.S. stocks are bouncing back after the market experienced its worst day in two years last month, but the average investor may still be understandably spooked. Over a three-day losing streak, the S&P 500 dipped more than 6% before rallying again the next day, up 1.6% in midday trading.
“This is what an emotion-driven market looks like,” said Mark Hackett, head of investment research for Nationwide. “You had a three-day period [in August] that was really very challenging. But the drop was not justified by the data that was out there, which is why you then have a [period of rebound].”
For everyday people, what are the best ways to handle market volatility? The top advice is to do nothing. But ultimately your response depends in part on your circumstances and financial goals.
“It’s important to remember that investing in the stock market is a long game. There’s going to be volatility, so be wary of having a knee-jerk reaction and pulling your money out at the first sign of a drop,” said Courtney Alev, consumer advocate for CreditKarma.
“Selling stocks frequently or incrementally can come with fees for each transaction, and those can add up fast.”
Caleb Silver, editor-in-chief of Investopedia, echoed this, cautioning that sellers may also end up owing taxes on any gains.
“For everyday investors, volatility is the price you pay to be invested in the stock market,” Silver said. “But it’s very unsettling when we see big market drops 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 [a change of 10% or more] once a year on average. Usually the market reverts to the mean, and the mean is an average annual return of 8 to 10% a year, going all the way back to the 1950s.”
In fact, declines in the stock market can be seen as an opportunity to add to your portfolio at cheaper prices, by buying in when the market is falling or has fallen a lot, according to Silver.
When you buy in a down market, “You’re reducing the average price you pay for the securities, stocks, mutual funds or index funds that you own,” Silver said. “So when the market itself reverts to the mean and rises again, you [will have taken] advantage of having bought at cheaper prices, and that adds to the value of your portfolio.”
In terms of selling, though, he said the best advice for most investors is to do nothing and wait for the volatility to cool down.
If you’re near retirement
Some investors may want to re-evaluate their comfort level, however.
“Whenever you invest in stocks it’s important to be mindful of your time horizon,” Alev said. “For instance, do you expect you’ll need to liquidate in the near future? In that case, you’re likely better off opting for a less volatile and more risk-averse mode of growing your money, such as 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 that it matches your risk appetite.”
If it doesn’t, you can move your investments to products that can shield you from the ups and downs of the market or unforeseen events. Silver noted that High Yield Savings Accounts, Certificates of Deposit and money market accounts are all currently seeing 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 portfolio in general —whether quarterly or annually — to make sure there isn’t more risk than one would want related to, say, technology stocks or another sector.
“If your exposures get out of line with your long-term plan, get them back in line,” he said. Even so, Hackett added that he sees the trend of tech stocks outperforming [other stocks] as one that may extend further into the future.
What to do if you have debt
Experts agree that, for investors with debt, it’s important to focus on paying off loans, especially high-interest ones, before making major investments.
That said, according to Silver, “if you are able to simultaneously pay off your loans and invest a little bit at the same time, you are effectively paying your future self for being responsible about your debt while growing your investments over time.” —AP
The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.
