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How to Invest in a Volatile Market

What should investors do in volatile markets? My advice is the same for all markets: If you’ve got a personalized investment plan, market jitters shouldn’t matter; ignore them and stay the course. If you’ve not yet got a plan, seize the day, and get one.

There, end of article. But I’ve got some space left though, so let’s elaborate.

First, about market volatility. I didn’t hear anyone complaining in 2017, when the S&P 500 Index was upwardly volatile by 22% for the year. It wasn’t until it dropped 6.4% month-to-date on February 5th that it suddenly seemed to matter.

Will stocks recover as quickly as they did in June 2016 when the UK Brexit vote caused a 5.4% fall in two days? Or when stocks fell by 10.3% over five weeks in early 2016? How about August 2015, when they fell 12% in a month? As I draft this piece (on Feb. 5, 2018), I don’t know. But I know this:

  1. Despite these meaningful declines, the market has moved up 31% since late July 2015.
  2. Volatility is essential to investing. Without it, you couldn’t expect returns any higher than those available from a bank CD – i.e., nothing, after inflation and taxes
  3. Volatility isn’t the same as risk – at least not over the long-term. If you don’t sell during the dips, you can expect to earn the market’s long-term growth.

However, if you have near-term expenses, the stock market is no place to park that cash. Real risk occurs when volatility causes the market to decline right when you must have your money.

Say your teenager is off to college in 2 years and her college funds are 100% in stocks. That’s risky. The market may decline just as she graduates from high school. On the other hand, if you’re investing for, or in, retirement it’s fine if the market takes the occasional breather. Your investment horizon is many years, likely decades, and will have plenty of time to recover.

So how should you invest in volatile markets? The same as ever: Do not react to changes in the market. Modify your portfolio only in response to changes in your personal financial life. Act, never react.

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