Volatility is normal
All investors should accept market volatility — which is relatively common — as a normal part of the process of investing and the best way to outrun inflation, said certified financial planner Brad Lineberger, president of Seaside Wealth Management in Carlsbad, California.
“Embrace the volatility, because it’s why investors are getting paid to own stocks,” he said.
This means investors should stay calm even through extreme movements. While stocks always move up and down, long-term market returns are still based on the same things: dividend yields, earnings growth and change in valuation, according to Zach Abrams, a CFP and manager of wealth management at Capital Advisors Ltd. in Shaker Heights, Ohio.
Movements up and down can also be a good time to review your asset allocation. If you’re worried about a big drop, you could rotate part of your portfolio into some less-risky stocks to protect from a potential market correction, which is a drop of more than 10%.
Opportunities arise when stocks fall
When stocks fall, it can also be an opportunity to buy more and set yourself up for future gains.
This is because when stocks decline from recent highs, they’re trading at a discount and will likely recoup losses at some point.
Continuing to put money in the market when it’s down as opposed to selling is a great way to make sure you don’t miss out on a reversal. Data shows that selling when the market falls can take you out of the game for some of the strongest rebounds.
For example, if you missed the best 20 days in the S&P 500 over the last 20 years, your average annual return would shrink to 0.1% from the 6% you’d have earned if you’d stayed the course.
Be prepared for emergencies
Of course, even if you know that stock market volatility can benefit you in the long run, financial advisors still recommend having a cash emergency fund on hand so that you can make it through a market meltdown without selling. This is especially important for retirees.
If the stock market falls, it’s better to spend the money in your emergency fund than sell assets at a loss that can’t be recouped, according to Tony Zabiegala, chief operations officer and senior wealth advisor at Strategic Wealth Partners, an Independence, Ohio-based firm.
