Beginner’s Guide to Market Volatility

42% of investors made a mistake when the pandemic hit that experts say is easy to avoid

"The knee-jerk reaction is usually the wrong one."


Investors reacted in two different ways when the pandemic began in March, according to a MagnifyMoney survey of nearly 1,000 Americans: 42% sold at least one stock, while the other 58% stayed the course and stuck to their routine through at least the end of September.

One group later regretted their choice.

Those who sold assets weren't happy for long, the poll shows. They said the virus caused their reaction: 60% wanted cash on hand in case of a recession, and 35% feared a market crash.

Meanwhile, of the respondents who didn't sell, 18% considered it but chose not to, 32% didn't even think about it, and 8% actually bought more stocks.

Bumpiness in the market can be triggered by external events, like the coronavirus crisis, so it's important to have a plan that can weather change, experts agree. Seasoned investors say the most successful strategy is to prepare for the long term, even if short-term circumstances seem to shift overnight.

"In the short term, markets can move suddenly in either direction — up or down," Greg McBride, chief financial analyst at personal finance website Bankrate, tells Grow. "As tough as it is, investors need to maintain a long-term perspective in the face of short-term volatility, and doing nothing is often a prudent course."

Remember, he adds, "the knee-jerk reaction is usually the wrong one."

Panic selling in times of uncertainty only locks in your losses, experts say, since pulling out of your investments during a decline can make it tougher to recover your money if the market eventually rebounds, as they did shortly after the March 2020 downturn.

It can be wise to maintain a diverse portfolio that includes a mix of stocks, bonds, and other vehicles. If your investments are varied and spread across different sectors, even if some areas of the market tumble, you're likely to remain invested in industries performing well, too.

That's a strategy championed by Securities and Exchange Commission Chairman Jay Clayton. "Don't put all your eggs in one basket," he wrote recently in notes shared with Grow. "Economists will tell you, you can reduce risk and keep the same returns by diversifying."

Maintaining perspective can 'help keep you from doing anything rash'

It's understandable that market swings can make investors nervous, especially those with less experience. MagnifyMoney found that young investors were much more likely to sell at least some stock when the pandemic began: More than half, 64%, of Generation Xers and 43% of millennials sold assets, respectively.

That's compared to just 10% of baby boomers who did the same.

"Seasoned investors have seen market corrections and bear markets, and the market eventually rebound, going on to set new highs," McBride says. "But newer investors may not have that perspective and be prone to bail at the first sign of trouble."

"Looking at long-term performance and precedent of market recoveries can help keep you from doing anything rash," he adds.

How to plan for stock market downturns

Video by Stephen Parkhurst

In June, for example, all the major indexes reported sharp declines as the number of newly confirmed infections grew. By August, the S&P 500 climbed 0.2% to a 3,389 record high.

So try to keep a level head and consider all your options before selling, Chris Briscoe, a certified financial planner, vice president, and wealth advisor at Girard recently told Grow. It's the strategy he used when markets experienced a downturn in March 2020.

"One factor that made this downturn feel even worse than past volatility was that most of us were stuck at home each and every day," Briscoe says. "We could not help but continue watching the news, checking our account balances, and worrying about our health, both personally and financially."

Think about "stepping away from the noise" or taking a break from the news for a while, he explains. "Call your advisor to talk through it. Take some time to revisit your plan and remember why you began investing and what you are investing for." 

Ideas for when you 'Feel the need to do something in the face of market volatility'? Some tips

Regardless of whether they are selling or keeping their stocks, investors are checking their portfolios more often, according to the survey findings. Nearly half, 48%, of respondents said they look at their investments more frequently now than before the outbreak.

More are choosing to ride out downturn, too. Nearly 60% of people in the poll chose not to react to volatility by selling.

In a separate survey from Bankrate, two-thirds of the 2,500 respondents said they intentionally did nothing with their portfolio, while 13% said they invested more money.

Doing nothing is often a prudent course.
Greg McBride
Chief financial analyst, Bankrate

If you're looking to invest but are feeling a bit hesitant, you can start small with exchange-traded funds or index funds. Each let investors buy a diverse assortment of assets and both tend to have low fees.

Plus, you'll get legendary investor Warren Buffett's stamp of approval.

Investors who "feel the need to do something in the face of market volatility," McBride says, can "add to positions that have been declining. This is 'buying the dip' — the equivalent of getting assets on sale."

Or, he suggests, look to "rebalance your portfolio back to its original investment mix, moving some money from what has outperformed into what has underperformed. This also enforces the discipline of selling high and buying low."

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