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NEW YORK (AP) — U.S. stocks are recovering after the market suffered its worst day in two years on Monday, but the average investor may still be feeling the pinch. The Standard & Poor’s 500 Index fell more than 6 percent in three straight days of losses before rebounding Tuesday, rising 1.6 percent in midday trading.
“This is what an emotionally driven market looks like,” said Mark Hackett, head of investment research at Nationwide. “We’ve had a very tough three-day period. But the decline was not justified by the data available, which is why we have a day like today.”
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For ordinary people, what are the best ways to deal with market volatility? The best advice is to do nothing, but ultimately your response will depend in part on your circumstances and financial goals.
What do you do in general?
“It’s important to remember that investing in the stock market is a long-term game. There will be volatility, so be careful not to react emotionally and pull your money out at the first sign of a downturn,” said Courtney Aliff, consumer advocate at CreditKarma. “Selling stocks frequently or gradually may come with fees for each transaction, and these fees can add up quickly.”
Caleb Silver, editor-in-chief of Investopedia, echoed this sentiment, warning that sellers could also end up paying taxes on any gains.
“For regular investors, volatility is the price you pay for investing in the stock market,” Silver said. “But it’s very disturbing to see the market go down 2% to 3%. … It’s a little disturbing for people who have money in 401(k) plans or IRAs or pension funds to see that much volatility.”
Silver urged investors to remember that “the market corrects 10 percent or more once a year on average,” and that “the market usually reverts to the mean, and the mean is an average annual return of eight to 10 percent a year going back to the 1950s.”
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What to do if you are a young or new investor
For younger people who are just starting out investing, stock market dips present an opportunity to add investments to your portfolio at cheaper prices, by buying when the market is down or falling significantly, according to Silver.
“You’re reducing the average price you pay for the securities, stocks, mutual funds or index funds that you own (when you buy in a bear market),” he said. “So when the market itself reverts to its mean and goes back up, you benefit from buying at cheaper prices, and that adds to the value of your portfolio.”
As for selling, he said the best advice for most investors is to do nothing and wait for volatility to subside.
What to do if you are about to retire
“When investing in stocks, it’s important to consider your time horizon,” says Alif. “For example, do you anticipate that you will need to liquidate your investments in the near future? In that case, you’re probably better off choosing a less volatile, lower-risk way to grow your money, such as a high-yield savings account.”
Silver agreed.
“I don’t believe what people say: ‘Don’t look at your 401(k) plan,’” he said. “You should definitely look at what you have and make sure it matches your risk appetite.”
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If not, you can move your investments into products that can protect you from market volatility or unexpected events. High-yield savings accounts, certificates of deposit and money market accounts are currently yielding between 4% and 5% for the more cautious or conservative investor, Silver said.
Nationwide’s Hackett said it makes sense to periodically rebalance the exposure one has in one’s overall portfolio — either quarterly or annually — to make sure one doesn’t have more risk than one wants in, say, technology stocks or another sector.
“If your exposures are out of your long-term plan, you need to bring them back in,” he said. However, Hackett added that he sees the outperformance trend in tech stocks extending into the future.
What to do if you have debt
Experts agree that for investors with debt, it’s important to focus on paying off loans, especially high-interest loans, before making big investments. However, “if you’re able to pay off your loans and invest a little at the same time, you’re essentially paying yourself back in the future by taking responsibility for your debt while growing your investments over time,” Silver said.
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The Associated Press receives support from the Charles Schwab Foundation for educational and informative reporting to advance financial literacy. The independent foundation is separate from Charles Schwab & Co. The Associated Press is solely responsible for its own journalism.
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