U.S. stocks have a case of whiplash.
Stocks slumped Thursday in one of the worst sessions seen so far this year. During intraday trading, the Dow Jones Industrial Average fell more than 1,000 points or 3%, while the S&P 500 lost 4% and the tech-heavy Nasdaq Composite slipped more than 5%.
The losses were a major reversal following one of the market’s best days of the year on Wednesday. Stocks rallied following the Federal Reserve’s half-point rate hike and Fed Chair Jerome Powell’s remarks that the central bank was not considering a 75 basis-point increase anytime soon.
The Dow ended the day up 932 points, or 2.81%, and the S&P 500 gained 2.99% for both averages best performances since 2020. The Nasdaq also gained 3.19%.
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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.
Expect and accept volatility
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.
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%.
Volatility means opportunity
When stocks fall, it can also be opportunities to buy more and set yourself up for future gains, according to Abrams.
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.
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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.
Have emergency savings ready
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.
This also keeps stock investments in the game for big turnarounds, which generally come shortly after market corrections or even smaller dips.
For example, an investor would have needed only three months to six months of living expenses in an emergency fund to avoid taking losses during the March 2020 meltdown, said Lineberger at Seaside Wealth Management.
This approach would have also kept investments in the market for the record-breaking rally stocks enjoyed after the pandemic slump.
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