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When the Stock Market hits choppy waters and indices begin to nose dive, there is always something to do. Many uninformed investors become depressed, irrational and some do commit suicide but that is not the solution. The Capital Market always goes up and down.
While volatility can be troubling for investors, experts caution against any hasty selling when markets fall or trying to time a market correction. In addition, slumping stock prices can be a prime buying opportunity that investors should take advantage of.
First, 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, which manages about $165 million in assets.
“Embrace the volatility, because it’s why investors are getting paid to own stocks,” he said.
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.
In addition, sharp moves down can also be opportunities to buy more stocks and set yourself up for future gains, according to Abrams.
This is because when stocks fall from recent highs, they’re trading at a discount and will likely rebound at some point, which sets investors up for larger returns.
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 rebound. Data shows that selling when the market goes down can take you out of the game for some of the strongest rebounds.
Sticking with your overall plan is generally the best thing you can do through a market slump, instead of panicking and selling too soon.
For investors who may be in or near retirement and more worried about a market fall, it’s important to shift investment thinking to protecting their assets from growing them or aiming for the highest return, which can mean taking outsized risks.
“Managing the risk is a really important part,” said Leyla Morgillo, a CFP with Madison Financial Planning Group in Syracuse, New York, which oversees about $200 million in assets. “It’s not about trying to shoot for the highest rate of return you can; it’s about protecting what you have.”
“Have the discipline to stick to your plan even when it doesn’t feel like the right thing to do,” Lineberger said. “Checking your emotions at the door is the hardest aspect of being a successful investor, but it’s the most important thing to do.”
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.
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 with more than $500 million in assets under management.
This also keeps stock investments in the game for big rebounds, which generally come shortly after market corrections or even smaller dips.
For example, an investor would have only needed 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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