The U.S. stock market is back in choppy waters.
On Wednesday, all three major U.S. indices — the Dow, S&P 500 and Nasdaq — slid on fears that rising inflation will lead to higher prices and boost interest rates, capping off a three-day losing streak in the market.
But on Thursday, stocks reversed course, ripping higher, led by so-called reopening trades such as airlines and cruise companies.
Such fluctuations can be worrying for investors, and especially for those who are in or near retirement. Yet, financial advisors say that the best course of action when markets go sideways is to stick with your previous investment plan.
First, accept market volatility — which is relatively common — as a normal part of the process of investing and the best way to outrun inflation, said certified financial planner Brad Lineberger, president of Carlsbad, California-based Seaside Wealth Management, which manages about $165 million in assets.
"Embrace the volatility, because it's why investors are getting paid to own stocks," he said.
This means investors should stay calm even through extreme movements. Even though stocks have gyrated in recent months, long-term market returns are still based on the same factors: dividend yields, earnings growth and change in valuation, according to Zach Abrams, a CFP and manager of wealth management at Shaker Heights, Ohio-based Capital Advisors, which manages around $800 million in assets.
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In addition, sharp moves down can also be opportunities to buy more stocks and set yourself up for future gains, according to Abrams.
Data shows that selling when the market goes down can take you out of the game for some of the strongest rebounds. For example, if you missed the best 20 days in the S&P 500 over the last 20 years, your average annual return would shrink to 0.1% from the 6% you'd have earned if you'd stayed the course.
And, over the long-term, stock market gains are strong. Even this year, stocks have made significant gains — the S&P 500 was up more than 8% through Wednesday's close.
Even if you know volatility is your friend in the long run, financial advisors recommend having a cash emergency fund on hand to make it through a potential market meltdown without selling.
If the stock market falls, it's better to spend the money in your emergency fund than sell assets at a loss that can't be recouped, according to Tony Zabiegala, chief operations officer and senior wealth advisor at Strategic Wealth Partners, an Independence, Ohio-based firm with more than $500 million in assets under management.
This also keeps stock investments in the game for big rebounds, like those seen in the last week and over the last year, since the major March 2020 selloff spurred by the coronavirus pandemic.
For example, an investor would have only needed three months to six months of living expenses in an emergency fund this year to avoid taking losses during the March 2020 meltdown, said Lineberger at Seaside Wealth Management. This approach would have also kept investments in the market for the record-breaking rebound rally stocks had after the pandemic slump.
Sticking with your overall plan is generally the best thing you can do through a market slump, instead of panicking and selling too soon.
For investors who may be in or near retirement and more worried about a market fall, it's important to shift investment thinking to protecting their assets from growing them or aiming for the highest return, which can mean taking outsized risks.
"Managing the risk is a really important part," said Leyla Morgillo, a CFP with Madison Financial Planning Group in Syracuse, New York, which oversees about $200 million in assets. "It's not about trying to shoot for the highest rate of return you can; it's about protecting what you have."
To stay committed to this goal, advisors recommend making a plan or road map for retirement investing long before you leave the workforce. This will act as a safeguard against making bad emotional decisions with your investments during extreme market events.
"Have the discipline to stick to your plan even when it doesn't feel like the right thing to do," Lineberger said. "Checking your emotions at the door is the hardest aspect of being a successful investor, but it's the most important thing to do."
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.