How to Weather Stock Market Volatility Like a Pro

Market ups and downs can rattle even the most seasoned investors. Certainly, this year has tested all of us! The truth is, you can’t predict the market, but you can control how you respond to the volatility. Learning how to ride those waves and keep your cool will go a long way toward your long-term financial success.

Before you react and make a change to your portfolio, ask yourself these three questions:

1. Should I Sell When the Market Drops?

It’s natural to want to sell when the market drops to avoid further losses. Before reacting to a major swing, ask yourself if anything has fundamentally changed about your financial goals. If the answer is no, then avoid trying to sell and buy back when you feel comfortable again, also known as timing the market. With that strategy, you must be right twice – knowing when to get out and when to get back in.

Here’s some more food for thought on this topic. If an investor missed the 10 best days in the market (S&P 500 Index®) over a 20-year period from 2002 – 2022, their return would be 5.3% versus 9.5%. Simply missing the 10 best days can cost your portfolio significant returns over the long run.

Instead of trying to predict the market, keep your focus on your long-term investment strategy. Historical returns show that markets do rebound so keeping emotions in check and riding it out can reduce your stress and reward your patience.

2. Am I in the right investments?

This is a question you should revisit annually. In addition to the ongoing review of your goals and time horizon, it’s important to check if your tolerance for risk has changed. As these items evolve, so should your investment portfolio.

It’s important to rebalance over time and sometimes periods of uncertainty can present or remind you of this opportunity. If your time horizon is shorter and your tolerance for risk has diminished, it could be a good time to rebalance to a more conservative portfolio. By contrast, you may find yourself with a higher tolerance for risk and if the market is down, you can rebalance and take advantage of the lower stock prices.

3. Is now a good time to invest?

A downturn in the market might present a good opportunity to invest or become more aggressive with your investments. One powerful strategy is dollar-cost averaging, which involves investing a fixed amount at regular intervals, regardless of market conditions. This approach takes the emotion out of investing, and it can take advantage of market volatility by allowing you to buy more shares when prices are low and conversely fewer shares when they’re high. Over time, this can lower your average cost per share and smooth out the impact of volatility.

We provide a more comprehensive overview of investment strategies in our learning guide Investing for Growth.

Volatility isn’t the enemy – it’s part of the journey. By avoiding market timing, committing to and reviewing your long-term strategy and consistently investing through dollar-cost-averaging, you can weather the storms and come out stronger on the other side.

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