Understanding Market Volatility
Market volatility refers to the rapid and significant price changes in the financial markets. For many, this can be a source of worry, especially when the market takes a hit, like the recent drop of the S&P 500 by over 6%. However, it's important to remember that volatility is a normal part of investing. As Mark Hackett, head of investment research for Nationwide, points out, "This is what an emotion-driven market looks like."
General Advice for All Investors
The first and often best piece of advice during volatile times is to do nothing. It's crucial to remember that investing is a long-term game. Sudden decisions, like pulling out investments at the first sign of a drop, can lead to losses. Courtney Alev from CreditKarma warns against frequent selling due to transaction fees and potential taxes on gains. Market drops of 2%-3% might be unsettling, but Caleb Silver from Investopedia reminds us that the market tends to average an annual return of 8%-10% over the long haul.
For Young or New Investors
For those new to investing, market declines can be seen as a buying opportunity. Silver advises buying when prices are low, which reduces the average cost of your investments. As the market recovers, these cheaper investments can increase in value, enhancing your portfolio. The best approach is patience; avoid selling and wait for the market to stabilize.
Approaching Retirement
For those near retirement, time is crucial. If you're close to needing your investments, consider shifting to safer options like high-yield savings accounts. These alternatives offer returns of about 4%-5% and reduce exposure to market fluctuations. Silver emphasizes the importance of ensuring your portfolio aligns with your risk tolerance. Rebalancing, or adjusting your investments, might be necessary to avoid unwanted risks, especially in volatile sectors like technology.
Managing Debt While Investing
If you have debt, prioritizing its repayment, especially of high-interest loans, is vital. Silver suggests that if you can, simultaneously pay down debt and invest modestly. This strategy helps you manage debt while steadily growing your investments over time. By balancing debt repayment and investment, you secure your financial future more effectively.
