Inventory market volatility could be a good factor for traders. Here is why

The “Charging Bull” statue in Bowling Green in New York’s Financial District.

Drew Angerer | Getty Images

The US stock market is falling again.

On Monday, all three major U.S. indices, led by travel stocks, slipped on fears that a recovery from Covid-19 would hurt economic recovery. The Dow fell more than 700 points, while the S&P 500 fell 1.6% and the tech-heavy Nasdaq fell 1.1%.

The sharp downturn came after all three indices had streaked weeks of victories on Friday as inflation fears mounted. Just a few weeks earlier, stocks had hit all-time highs.

While volatility can be a concern for investors, experts warn against selling too hastily when markets are falling. Additionally, falling stock prices can be a prime buying opportunity that investors should take advantage of.

Volatility is common

First, accept the relatively frequent market volatility as a normal part of the investment process and the best way to escape inflation, said certified financial planner Brad Lineberger, president of Seaside Wealth Management based in Carlsbad, Calif., Which manages approximately $ 165 million in wealth.

“Take volatility into account, because that’s how investors get paid to own stocks,” he said.

That means investors should stay calm even with extreme movements. Since stocks have fluctuated over the past few months, long-term market returns are still based on the same factors: dividend yields, earnings growth, and valuation changes, according to Zach Abrams, CFP and manager of wealth management at Shaker Heights, Ohio. Capital Advisors, which has approximately $ 800 million in assets under management.

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Ups and downs can also be a good time to review your asset allocation. If you fear a sharp decline, you can convert part of your portfolio into less risky stocks to protect yourself from a potential market correction that means a decline of more than 10%.

For example, Morgan Stanley analysts believe now may be a good time to look into consumer staples.

Volatility can be your friend

Additionally, according to Abrams, sharp downturns can also be opportunities to buy more stocks and prepare for future gains.

This is because when stocks fall from recent highs they trade at a discount and are likely to bounce back at some point, aiming investors for higher returns.

Continuing to invest money in the market when it is in the red instead of selling is a great way to ensure you don’t miss out on a rebound. The data shows that when the market falls, selling can take you out of the game for some of the strongest rebounds.

For example, if you missed the top 20 days in the S&P 500 in the last 20 years, your average annual return would drop from the 6% you would have made if you stayed on the course to 0.1%.

And despite the recent downturn in the market, stocks have performed strongly this year. By the close of trading on Friday, the S&P 500 was up over 15% year-to-date.

Have an emergency fund

Of course, even if you know that stock market volatility can benefit you over the long term, financial advisors still recommend having a Barnot fund on hand to help you weather a market slump without selling.

When the stock market falls, spending the money in your emergency fund is better than selling assets at a loss that cannot be recovered, according to Tony Zabiegala, chief operations officer and senior wealth advisor at Strategic Wealth Partners, at Independence, Ohio -based company with over $ 500 million in assets under management.

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