Following a rocky September, Wall Street’s main indices have so far see-sawed between gains and losses as inflation concerns tempered optimism over the pace of the US economic recovery.
How the rest of October will play out remains to be seen. With the Chicago Board Options Exchange’s CBOE Volatility Index (VIX) rising above 20, the road ahead could remain rocky. The VIX is commonly referred to as investors’ “fear gauge”. For the past three months, it has hovered around the mid-teens level.
It can be unnerving when markets whip back and forth, and you may be tempted to hit the panic button and sell your investments. That’s a costly mistake. Instead, the better option is to keep calm and carry on with your investment plan.
Selloffs are a natural part of investing
Stock markets do not keep going up, forever. From time to time, it is normal that stock prices will experience pullbacks due to negative economic developments, political shocks, disappointing corporate earnings reports, or other factors that affect investor sentiment.
You can think of a pullback as a sort of a reset for the stock market before it recovers and rises to its former highs. Think back to last September (2020) when the S&P 500 experienced a nearly 10% drop. If you had panic-sold your assets and never re-entered the stock market, you would have missed out on the S&P 500’s seven-month winning streak this year.
During market corrections, your emotions can often be your own worst enemy. Going to cash may feel comforting when markets are down, but selling during a downturn essentially turns your paper losses into real losses.
Stick to your investment plan
If you’re investing for the future – say, making regular contributions to your retirement savings account – a short-term downturn is not a reason to radically change your investment strategy and / or sell off huge chunks of your portfolio.
Your best option is simply to hang on tight. During the 2008 global financial crisis, those who stayed invested in the S&P 500 recorded twice the returns of those who fled to cash for as little as three months.
Making drastic changes to your portfolio now is counterproductive. But by holding on, you’re already in position to capture the gains when the market inevitably bounces back.
An opportunity to buy quality investments at a discount
Warren Buffett famously said that investors need to be “greedy when others are fearful, and fearful when others are greedy”. As other investors flee, his mantra suggests that a market decline could be a good time to cash in on lower equity prices.
The goal is to buy and hold these investments for the long term, giving them time to recover their value. An effective strategy for long-term investors to put their excess cash to work at discounted prices is by dollar cost averaging (DCA). Simply put, you invest a certain amount into the market at regular intervals. This way, you can capitalise on lower prices now while avoiding the risk of buying all at once ahead of another market drop.
This method also helps to take emotions out of your investing. By investing a consistent sum regularly – regardless of current market conditions – you eliminate the temptation to second-guess your investment strategy, or time the market.
Think long term
Market volatility can be unsettling, but it is part and parcel of investing. It’s worth remembering that over any 20-year period, the US stock market has never lost money. The average annual return over a 20-year period stands at about 6.7%.
As a long-term investor, your best strategy to navigate choppy markets is to stay invested and not panic. With the right mindset, you’ll be able to overcome any market ups and downs and emerge more resilient than you were before.