Rapid changes in the market can cause some investors to fret — frantically checking on their shares and wondering if they should make a move. Market ups or downs have the potential to bring investors big losses or attractive gains, so this behavior is understandable. But, as the saying goes, “Change is inevitable” — and, if you look back over the course of history or follow current trends over time, you’ll find this rings true in the investing world as well.
These market ups and downs are commonly referred to as market volatility. If you look at a market summary of any company, you can see volatility show up in the peaks and valleys plotted on a graph. Do a quick online search for the market summary of any company, and you’ll see what we mean. Many experts try to predict rises and falls in the market, but there really is no 100% certainty if and when these fluctuations will occur.
To get through stock market volatility with your wits (and portfolio) intact, it can be helpful to gain a little perspective and not make any sudden moves motivated by fear or emotion. Follow the tips below for ways to keep a level head, even when you feel on the verge of panic.
Maintain your cool during stock market dips.
First, accept that market drops are normal. Historically, when you look at stocks over the long term, the trend has been for them to climb higher, interspersed with short periods of declines. Consider this: Between October 2002 and September 2007, the S&P 500 was up 52 percent. Then, from October 2007 to March 2009, it lost more than 51 percent of its value. Since then, from April 2009 to the end of 2019, the S&P 500 was up 275%.
In this instance, periods of growth were longer and larger than the downturn. This pattern is the historical norm.
Pro tip: Financial experts refer to a short-term downturn of at least 10 percent as a correction, whereas a bear market is defined as a downturn of at least 20 percent from the high.
Know what creates uncertainty.
Aside from normal price adjustments, specific events can also cause market turmoil.
Markets dislike uncertainty, and the global COVID-19 pandemic has sent shockwaves through economies worldwide. While stocks have made an impressive bounce since March 1 by rallying 23% as of 8/4/20, there’s no shortage of unknowns. On top of which, things can be particularly uncertain right before an election, because it’s unclear which candidate’s and party’s economic view will prevail.
For example, in 2016, the S&P 500 surged 23 percent post-election to the end of the year. Even a slightly clearer sense of what might come next brought calm to the markets.
Other factors affecting markets can be tariffs and tough talk on trade. Markets typically thrive on free trade and if there’s a perception that it could be curtailed, stocks historically fall. For example, in 2002, the U.S. imposed steel tariffs (excluding Canada and Mexico), and, in the wake of the European Union’s threatened retaliation, stocks fell.
You have no control over the many causes of market volatility — but you can choose how you respond.
The smartest move for your portfolio? Keep your emotions in check. One of the worst things you can do is panic and sell your stocks based on fear, since it’s impossible to time the market’s ups and downs.
That doesn’t mean you should sit idly by and do nothing during a downturn or general volatility. Instead, consider the following:
- Reevaluate: Examine your investments. Is your investing approach up-to-date and tailored to your risk tolerance, investment goals, and time frame?
- Adjust, if necessary: If your portfolio doesn’t align with your investment profile, make changes to better position your investments for all market conditions. Ally Invest professionals can help you create and regularly rebalance a diverse Managed Portfolio that’s based on your risk tolerance, projected length of investment, and wealth outlook.
- Go shopping: If you can stomach market slumps and have cash on hand, consider taking advantage of downside volatility by purchasing more stocks, bonds, mutual funds, or ETFs. You’ll be buying at a discount.
Turbulent market conditions are a part of investing. But just because the market may stall or trend downward, that doesn’t mean it’s time to grab your parachute and head for the nearest exit. Instead, tighten your seat belt, know your safety measures, and, you might find smoother conditions ahead.
Stay in the know with what’s going on in the investing world with our Chief Investment Strategist Lindsey Bell’s weekly market updates. As an Ally Invest customer, you can receive them in your inbox every Friday.
In addition, market experts Brian Overby and Lindsey Bell of Ally Invest provide real-time analysis of stock moves and market trends every Monday at 12 p.m. ET on YouTube. Sign up here to receive alerts for the free Livestream. See the full list of episodes here.