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US stocks have a case of whiplash.
Stocks fell on Thursday in one of the worst sessions seen so far this year. During intraday trading, the Dow Jones Industrial Average fell more than 1,000 points or 3%, while the S&P 500 lost 4% and the tech-heavy Nasdaq Composite fell more than 5%.
The losses were a major turnaround after one of the best market days of the year on Wednesday. Stocks rose on the back of the Federal Reserve’s half-point rate hike and comments from Fed Chairman Jerome Powell that the central bank was not considering a 75 basis point rate hike any time soon.
The Dow ended the day up 932 points, or 2.81%, and the S&P 500 gained 2.99% for both averages, the best performance since 2020. The Nasdaq also gained 3.19%.
While this type of whiplash can be worrying for investors, experts warn against making rash decisions when markets fall. Volatility can create opportunities to buy more of your favorite stocks and prepare for future gains.
Wait and accept volatility
All investors should accept market volatility, which is relatively common, as a normal part of the investment process and the best way to beat inflation, said certified financial planner Brad Lineberger, president of Carlsbad-based Seaside Wealth Management. , Calif.
“Accept volatility, because that’s why investors get paid to own stocks,” he said.
This means investors need to remain calm even through extreme moves. While stocks always go up and down, long-term market returns are still based on the same things: dividend yields, earnings growth and changes in valuation, according to Zach Abrams, CFP and manager of wealth management at Shaker Heights, based in Ohio. Capital Advisors.
Moves up and down can also be a good time to review your asset allocation. If you’re worried about a big drop, you might rotate some of your portfolio into some less risky stocks to protect yourself from a possible market correction, which is a drop of more than 10%.
Volatility Means Opportunity
When stocks fall, there may also be opportunities to buy more and prepare for future gains, according to Abrams.
This is because when stocks fall from recent highs, they trade at a discount and are likely to recoup losses at some point.
Continuing to put money into the market when it is down rather than selling is a great way to ensure you don’t miss out on a reversal. The data shows that selling when the market drops can take you out of the game for some of the strongest rebounds.
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For example, if you missed the best 20 days in the S&P 500 over the last 20 years, your average annual return would drop to 0.1% of the 6% you would have earned had you followed the course.
Have emergency savings ready
Of course, even if you know that stock market volatility can benefit you in the long run, financial advisors still recommend having an emergency fund of cash on hand so you can ride out a market crash without selling. This is especially important for retirees.
If the stock market falls, it’s better to spend the money in your emergency fund than to sell assets at a loss that can’t be recovered, according to Tony Zabiegala, chief operating officer and senior wealth advisor at Strategic Wealth Partners, an Independence elder. , Ohio. -based company.