NEW YORK (AP) — U.S. stocks are rebounding after the market experienced its worst day in two years on Monday, but the average investor may still be understandably spooked. In a three-day losing streak, the S&P 500 fell more than 6% before rising again on Tuesday.
“This is what an emotionally driven market looks like,” said Mark Hackett, head of investment research at Nationwide, a financial services firm. “We had a three-day period that was really, really tough. But the decline was not justified by the data that was available, and that’s why you have a day like today.”
By Thursday, the market had recovered significantly again, recording its best day since 2022 following an encouraging US employment report.
For the average person, what are the best ways to deal with market volatility? The main advice is to do nothing, but ultimately the answer you give depends in part on your circumstances and financial goals.
What to do in general
“It’s important to remember that investing in the stock market is a long-term game. There will be volatility, so be careful not to react impulsively and pull your money out at the first sign of a drop,” said Courtney Alev, a consumer advocate at CreditKarma, a personal finance company. “Selling stocks frequently or incrementally can involve fees for each transaction, and these can add up quickly.”
Investopedia editor-in-chief Caleb Silver agrees, warning that sellers could also end up owing taxes on the gains.
“For everyday investors, volatility is the price you pay for investing in the stock market,” Silver said. “But it’s very disconcerting when we see big market declines of two to three percent … For people who have their money in 401(k)s or IRAs or retirement funds, it’s a little unsettling to see this magnitude of volatility.”
Silver urged investors to remember that “a market goes into a correction, 10 percent or more, once a year, on average,” and that “typically the market reverts to the mean, and the mean is an average annual return of eight to 10 percent a year, going back to the 1950s.”
What to do if you are a young or new investor
For young people just starting to invest, stock market declines are an opportunity to add assets to their portfolio at cheaper prices if they buy when the market is falling or has fallen a lot, according to Silver.
“You reduce the average price you pay for the securities, stocks, mutual funds or index funds you own (when you buy in a down market),” he explained. “So when the market reverts to the mean and goes up again, you benefit from having bought at cheaper prices, and that adds to the value of your portfolio.”
In terms of selling, however, he said the best advice for most investors is to do nothing and wait for volatility to subside.
What to do if you are close to retirement
“Whenever you invest in stocks, it’s important to consider your time horizon,” Alev explained. “For example, do you expect to have to sell in the near future? In that case, you’re probably better off choosing a less volatile, more risk-averse way to grow your money, such as a high-yield savings account.”
“I can’t believe it when people say, ‘Don’t check your 401(k),’” he said. “You definitely need to look and see what you own and see if it matches your risk tolerance.”
If not, you can 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 currently have yields of between 4% and 5% for the more cautious or conservative investor.
Nationwide’s Hackett said it makes sense to periodically rebalance how much exposure you have in your overall portfolio — either quarterly or annually — to make sure there’s not more risk than you’d like associated with, say, technology or other sector stocks.
“If your exposure levels are out of line with your long-term plan, bring them back into line,” he said. Still, Hackett added that he believes the trend of tech stocks outperforming the market average could extend even further in the future.
What to do if you have debts
Experts agree that for investors with debt, it’s important to focus on paying down loans — especially high-interest ones — before making major investments. That said, “if you can simultaneously pay down your loans and invest a little at the same time, you’re actually paying your future self back for being responsible about your debt (today) while growing your investments over time,” Silver said.
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2024-08-15 04:34:04
