NEW YORK (AP) — USA Stocks recover after the market his worst day in two years on Mondaybut the average investor is understandably still unsettled. During a three-day losing streak, the S&P 500 lost more than 6% before rebounding on Tuesday, gaining 1.6% in midday trading.
“This is what an emotion-driven market looks like,” said Mark Hackett, head of investment research at Nationwide. “We had a three-day period that was really very challenging. But the decline was not justified by the data available, which is why we have a day like today.”
What’s the best way for ordinary people to deal with market volatility? The best advice is to do nothing, but ultimately how you respond will depend in part on your circumstances and financial goals.
What should be done in general?
“It’s important to remember that investing in the stock market is a long-term business. There will be volatility, so be cautious about jumping to conclusions and pulling your money at the first sign of a decline,” said Courtney Alev, consumer advocate at CreditKarma. “Frequent or gradual selling of stocks can incur fees for each transaction, and these can add up quickly.”
Caleb Silver, editor-in-chief of Investopedia, echoed that sentiment, but warned that sellers may ultimately have to pay taxes on any gains.
“For regular investors, volatility is the price they pay for their investments in the stock market,” Silver said. “But it’s very concerning when we see big market declines of two to three percent… For people who have their money in 401(k) plans, IRAs or retirement funds, it’s a little bit concerning to see this volatility at the scale it’s at.”
Silver urged investors to remember that “on average, a market experiences a correction of ten percent or more once a year” and that “the market usually reverts to the mean, and the mean is an average annual return of eight to ten percent going back to the 1950s.”
What to do if you are a young or new investor?
For younger people just starting out investing, Silver says stock market declines are an opportunity to expand their portfolio at cheaper prices by investing in falling or sharply falling market prices.
“You reduce the average price you pay for the securities, stocks, mutual funds or index funds you own (when you buy in a declining market),” he said. “Then when the market reverts to the mean and goes back up, you benefit from having bought at cheaper prices, and that increases the value of your portfolio.”
As for selling, he said the best advice for most investors is to do nothing and wait for volatility to subside.
What to do when retirement approaches?
“When investing in stocks, it is important to keep your time horizon in mind,” said Alev. “For example, do you expect to need to liquidate in the near future? In that case, you are probably better off choosing a less volatile and more risk-averse way of growing your money, such as a high-interest savings account.”
Silver agreed.
“I don’t believe it when people say, ‘Don’t look at your 401(k),'” he said. “You should really look at what you have and whether it fits your risk tolerance.”
If not, you can shift your investments into products that can protect you from the ups and downs of the market or unforeseen events. Silver said that high-yield savings accounts, Certificates of depositand money market accounts all currently yield around 4% to 5% for the more cautious or conservative investor.
Nationwide’s Hackett said it makes sense to generally rebalance portfolio exposure on a regular basis – be it quarterly or annually – to ensure there is no more risk than desired in, say, technology stocks or another sector.
“If your exposures are no longer aligned with your long-term plan, get them back in line,” he said. Still, Hackett added that he believes the trend of technology stocks outperforming could continue in the future.
What to do if you are in debt?
Experts agree that it’s important for indebted investors to focus on paying down loans, especially high-interest ones, before making major investments. That said, “If you’re able to simultaneously pay down your loans and invest a little, you’re effectively paying your future self to manage your debt responsibly while also growing your investments over time,” Silver said.