Should I pull my money out of the stock market? Navigating a Volatile Market
When the stock market becomes volatile, prices change quickly. Should you panic and sell? Or stay the course? Here’s how to navigate market volatility.
June 27, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
The stock market can be a volatile place. Over the long term, prices tend to go up — but in the short term, market performance can be all over the place.
When markets dip and it feels like a crash is coming, it can be difficult not to panic. But seasoned investors know that volatility is just a part of long-term investing.
Here’s a rational, clear-cut guide on how to navigate stock market volatility now and in the future.
Don’t make investment decisions while panicked
First and foremost, remember this: Investment decisions should be made carefully and thoughtfully. You should never make important financial decisions in a panicked state.
If you’re feeling nervous about market movements, think about the long-term outlook. While the market might be down today or this month, think about where it might be in a year, five years or 10 years.
The stock market tends to go in cycles. Pullbacks and even crashes are often a necessary, healthy part of long-term asset price growth. To see a full picture of the cycle, pull up a chart of the S&P 500 index fund and zoom out to the maximum history length.
If you’re feeling panicked, one strategy is to simply ignore your portfolio. Focus on the things that are in your control — and if possible, try to find some extra money in your budget to buy additional assets at a “discount.”
Should I pull my money out of the stock market?
When the market starts to decline, it’s often tempting to sell your assets and sit on cash for a while. This is a form of market timing — which is simply trying to time investment decisions to align with stock market movements.
Unfortunately, it’s nearly impossible to time these decisions correctly. For one, you might sell too late — and end up selling at the lowest point in the crash.
Or, you may sell before a big crash, and wind up with a bunch of cash. However, you then have to decide when to buy back in, which is equally tricky to time correctly.
The stock market often rebounds quickly. If you miss out on the best days of stock market growth, the results can be dismal. In fact, missing just a few days of market growth can tank your long-term returns.
Finally, keep this golden principle in mind: You haven’t lost money until you sell.
If you own 100 shares of Apple stock, you own 100 shares of Apple stock — the amount is fixed. If Apple stock declines in value, the current value of your asset has decreased — but you haven’t actually lost any money or any of your shares of Apple.
If you can keep this principle in mind, and keep buying during downturns, you can reduce the anxiety that comes with market fluctuations.
A long-term investing plan can help ease market anxiety
The common advice during market downturns is to “stick to the plan.” But what if you don’t have a plan?
This is one reason why all investors should have an investment plan in place. This plan should cover the following and more:
Goals: What are you investing for? You can have multiple goals at the same time. For instance, you may be saving for long-term goals, like retirement, as well as medium-term goals, like a house down payment.
Risk tolerance: This refers to how much risk you are willing to take with your investments. You can take a risk tolerance quiz to determine your range.
Time horizon: How quickly do you need the money from your investments? If you are saving for retirement, you might have decades to save — and decades for your investments to recover from losses. If the time horizon is shorter (i.e. five years or less), you may wish to be more cautious with your investments.
Diversification: Your portfolio should be diversified. This means that you should own a variety of different assets and not be too concentrated in any one company, industry or asset class. Portfolio diversification can also help to even out the bumpy road of investing, because when stock prices decrease, other asset classes (bonds, alternative assets, etc.) may rise.
Cash buffer: It’s also wise to have a chunk of cash set aside in a savings account or high-yield savings account. This can help ease market anxiety, as you know that you have a cash cushion should you need it. At a minimum, you should have an emergency fund set aside.
Exit plan: It’s helpful to have an exit plan in place. This is basically a predetermined strategy of when, how and why you will start to sell assets. For example, in retirement accounts, you may map out how you plan to sell X assets each year to fund your lifestyle. This plan could also include instructions on whether or not you will sell during market turbulence. For example, you could have a stipulation that states that you may sell 10% of your assets if the market drops more than 15%.
You should consider all these factors and more when crafting your investment plan. Make sure to actually document the plan as well. You can create what is called an investment policy statement with the help of a template.
This statement essentially lays out your investment philosophy, your goals, your time horizon and your desired asset allocation.
Reassess your plan for future market volatility
So, should you pull your money out of the stock market? Once you have an investment plan, it’s wise to reassess it periodically, particularly after market crashes.
Did your plan align with your actions or reactions during market turbulence?
For example, maybe you thought that you had a high risk tolerance, but you ended up panic selling during a 20% market crash. If this is the case, it’s likely time to reassess your plan, and potentially decrease the risk level of your portfolio.
If you want help customizing your plan, it’s a good idea to talk to a fiduciary financial advisor - rather than just wondering “should I pull my money out of the stock market.” These investment professionals can help you to learn more about the markets, your comfort with risk and how to build a more balanced portfolio.
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