The U.S. stock market has been on a rollercoaster ride of late.
Stocks slumped again on Tuesday after a wild trading session a day earlier that resulted in some of the largest recoveries on record.
The Dow Jones Industrial Average shed about 400 points Tuesday morning after rallying from a roughly 1,100 point loss to close higher during Monday’s session. The S&P 500 fell about 1.7% after briefly dipping into correction territory, a drop of 10% or more, on Monday. The tech-heavy Nasdaq Composite traded more than 2% lower early in the day.
While this kind of whiplash can be troubling for investors, experts caution against making any rash decisions when markets fall. Volatility can lead to opportunities to buy more of their favorite stocks and set themselves up for future gains.
Loading chart…
Volatility is the norm
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 Carlsbad, California-based Seaside Wealth Management.
“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 Shaker Heights, Ohio-based Capital Advisors.
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.
