The volatility of the stock markets can be a good thing for investors. here’s why

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The Charging Bull statue at Bowling Green in New York’s financial district.

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The US stock market is down again.

On Monday, the three major US indices slipped, led by travel stocks, fearing that a rebound in Covid-19 could hurt the economic recovery. The Dow Jones fell more than 700 points in the morning, while the S&P 500 and the tech-rich Nasdaq both fell about 1.2%.

The sharp drop came after all three indexes broke multi-week winning streaks on Friday as inflation fears escalated. A few weeks earlier, stocks were reaching all-time highs.

While the volatility can be troubling for investors, experts warn against any rushed sell-off when markets fall. Additionally, falling stock prices can be a prime buying opportunity that investors should take advantage of.

Volatility is common

First, accept market volatility – which is relatively common – as a normal part of the investment process and the best way to beat inflation, said Brad Lineberger, Chartered Financial Planner, President of Carlsbad-based Seaside Wealth Management, in California, which manages approximately $ 165 million in assets.

“Accept volatility, because that’s why investors are paid to own stocks,” he said.

This means that investors must remain calm even in the event of extreme movements. While stocks have turned in recent months, long-term market returns still hinge on the same things: dividend yields, earnings growth and valuation movement, according to Zach Abrams, CFP and manager of the wealth management at Shaker Heights, Ohio Capital Advisors, which manages approximately $ 800 million in assets.

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Upward and downward movements can also be a good time to revisit your asset allocation. If you’re worried about a big drop, you can pivot part of your portfolio to less risky stocks to protect yourself from a possible market correction, which is a drop of more than 10%.

For example, maybe now is the time to look at consumer staples, analysts at Morgan Stanley say.

Volatility can be your friend

In addition, according to Abrams, steep declines can also be opportunities to buy more stocks and prepare for future gains.

This is because when stocks fall from recent highs, they are trading at a haircut and will likely rebound at some point, preparing investors for larger returns.

Continuing to put money in the market when it’s down rather than selling is a great way to make sure you don’t miss a rebound. The data shows that selling when the market is falling can kick you out of the game for some of the strongest bounces.

For example, if you missed the best 20 days of the S&P 500 in the past 20 years, your average annual return would drop to 0.1% from the 6% you would have earned if you had stayed the course.

And, even with the recent market downturn, stocks have performed well this year. Until Friday’s close, the S&P 500 is up more than 15% year-to-date.

Have an emergency fund

Of course, even if you know that stock market volatility can benefit you in the long run, financial advisers always recommend having an emergency cash fund so you can get through a market meltdown without selling.

If the stock market falls, it’s better to spend the money in your emergency fund than to sell assets at a loss that cannot be recovered, according to Tony Zabiegala, COO and senior wealth advisor at Strategic Wealth Partners, an Independence, Ohio based company with over $ 500 million in assets under management.


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