The U.S stock market has began to fall again. On Monday, three major U.S indexes slid, led by travel stocks, on fears that the pandemic rebound would damage the economic recovery. The Dow fell more than 700 points, while the S&P 500 dropped 1.6% and the tech-heavy Nasdaq slumped 1.1%. The sharp decline came after all three indexes snapped weeks-long winning streaks Friday as inflation rates fears increased; just weeks earlier, stocks were at all-time highs.
Stock market volatility offers excellent opportunities for traders and investors. Traders can use brokers that allow them to exploit the volatility using leverage by trading various stock derivatives. At the same time, investors can time the market and enter when the prices are low, guaranteeing they get more stocks at a reasonable buying price.
Why Investors should accept and embrace Stock Market Volatility
Volatility in the stock market is relatively common. As put forward by Brad Lineberger, president of Carlsbad, a California-based Seaside Wealth Management, “Embrace the volatility because it’s why investors are getting paid to own stocks.”
Consequently, investors should remain calm even through extreme movements.
“As stocks have gyrated in recent months, long-term market returns are still based on the same things: dividend yields, earnings growth, and change in valuation.” Stated Zach Abrams, a CFP and wealth manager at Shaker Heights, an Ohio-based Capital advisor that manages over $800 million in assets.
The up and down movements can also be a great 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%.
Advantages of Volatility to Investors
Stock market volatility is not always a bad thing, as it can sometimes provide entry points from which investors can take advantage.
Downward market volatility offers investors who believe markets will perform well, in the long run, to buy additional stocks in companies that they like at lower prices.
For instance, investors can purchase a stock for $50 that was worth $100 a short time before. Purchasing stock in this way lowers your average cost-per-share, which helps to improve your portfolio’s performance when markets eventually rebound.
Continue putting your money in the market when it’s down instead of selling is a great way to ensure you don’t miss out on a rebound. Data reveals that selling can take you out of the game for some of the strongest rebounds when the market goes down.
For instance, if you missed out on 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.
And, even with the market’s recent downturn, stocks have had a strong performance this year. Through Friday’s close, the S&P 500 is up over 15% year to date.
Investing when markets are volatile, and valuations are more attractive can give investors the potential to generate strong, long-term returns.
Maintaining a Long-Term View
First, timing the market is difficult for most investors, which is why you should stay the course, then attempt to time things and fail to capture a great opportunity or make a grave mistake of selling too low and too early.
Second, the best days have a significant impact. History reveals that stock markets often correct after three downwards waves. This means that investors that exit may miss the best recovery days and most attractive buying opportunities, which can significantly impact longer-term returns.
Remaining the course when most investors are panic-selling usually benefits you if you take a long-term view.
Third, good companies need time. Quality companies with strong fundamentals do better when economic conditions slow down or market volatility increases. Investors may be better off to weather the storm, as these companies often come out even stronger, even though it takes a while to reflect this in the stock price.
Keep an Emergency Fund
Even if you know volatility can benefit you in the long run, financial advisors recommend keeping an emergency fund so that you can make it through a market meltdown without selling. It’s best to keep stocks investments in the game for big rebounds, which generally come shortly after corrections or even smaller dips. However, maintain an emergency fund to use during this period to avoid the temptation of selling too early.