Following the stock market during the latter part of January has been comparable to riding a roller coaster — something I’m openly not a fan of. And while some investors felt that the market was way overdue for a downturn, it doesn’t make it any easier for those of us who are seeing notable swings in our portfolios.
Given the volatility the past week has delivered, you may be wondering whether you’re better off giving up on the stock market and putting your money elsewhere. But while it’s easy to see why you’d be tempted to go that route, in reality, your best bet may be to sit tight and do nothing at all.
Volatility is normal
If you’re new to investing, you may be inclined to get spooked when stock values take a tumble. But actually, stock market volatility is quite normal. So are stock market dips. And so difficult as it may be, it’s important to not resort to rash decisions — like dumping your portfolio — when the stock market takes a turn for the worse.
One thing you must remember about buying stocks is that even if your portfolio value drops substantially on paper or on screen, you don’t actually lose money unless you sell off stocks at a price that’s lower than what you paid. And so if you sit back and leave your investments alone during periods of volatility, you’ll put yourself in a solid position to get through those turbulent periods unscathed.
In fact, as a general rule, it’s smart to take a buy and hold approach to owning stocks, which means loading up on quality investments and hanging on to them for decades at a time. If you follow this rule, you’ll recognize that near-term volatility may be difficult to stomach, but that in the grand scheme of a 30-, 40-, or 50-year investing window, it’s meaningless. And if you pledge to hang onto your stocks through thick and thin, there’s a strong chance you’ll end up getting rewarded for it.
Protecting yourself
Although stock market downturns tend to be temporary in nature, it’s still not a bad idea to protect yourself from potential losses by maintaining a diverse portfolio. Within the realm of stocks, that means owning companies across a range of market sectors. You can achieve this by hand-picking different companies from different industries, or by loading up on broad market ETFs.
The great thing about ETFs is that they allow you to own a bunch of stocks at a time, and without having to do a ton of research. If you feel your portfolio isn’t diverse enough, consider adding some S&P 500 ETFs to your personal mix.
Don’t panic
It’s easy to get nervous when stock values plunge, and it’s natural to want to dump your stocks rather than endure further losses. But remember, unless you actually sell off stocks, the losses you’re seeing are hypothetical. And so the best thing you can do during periods of volatility is leave your portfolio alone.
That said, there’s an exception to this rule. If you have cash on hand, you can jump on the opportunity to add quality stocks to your portfolio while their value is down as part of a broader market correction. And that’s a great way to benefit from stock market volatility, nerve-wracking as it may be.
