Beginner’s Guide to Market Volatility

The president's chief economic counsel said people should invest in the market — here's why that's smart

Larry Kudlow, national economic council director, speaking at the World Economic Forum in Davos, Switzerland, January 21, 2020.
Adam Galica | CNBC

The U.S. stock market has plummeted this week in a sell-off that's seen both the S&P 500 and Dow Jones Industrial Average fall into corrections, or declines of at least 10% from recent highs. Both benchmarks are down more than 14% as of mid-Friday.

As this sell-off intensified mid-week, National Economic Council Director Larry Kudlow said that worries are overstated, and that it's actually a good time for investors to buy, not sell.

"We have contained this. I won't say [it's] airtight, but it's pretty close to airtight," Kudlow told CNBC on Tuesday. "To me, if you are an investor out there and you have a long-term point of view, I would suggest very seriously taking a look at a stock market that is a lot cheaper than it was a week or two ago."

Why it can make sense to buy when markets go down

When the stock market is down, stocks are less expensive, so you get more for your money. Buying when the market is trending downward is called "buying the dip." It assumes that the market will rebound, as it always has in the past.

Most investors, however, shouldn't try to time the market with the assumption that prices are going to snap back immediately and deliver a big return. Instead, most financial professionals recommend that you continue to make regular investment contributions no matter what's happening in the market. That allows you to take advantage of dollar-cost averaging, meaning that the costs of your portfolio have averaged out, or "smoothed out," over time. That can help protect you from wild swings in the market.

Essentially, buying stocks at a variety of prices over time reduces the risk that a big market downturn will damage your portfolio.

Kudlow isn't the only high-profile expert voicing the opinion that now is a smart time to buy. Warren Buffett is also bullish on the stock market, despite the threat of coronavirus, and has pointed out that downturns can mean great deals for long-term investors.

'I don't think it should affect what you do with stocks'

Buffett, in a Monday interview on CNBC, said that the spreading coronavirus is "scary stuff" but he doesn't "think it should affect what you do with stocks." Buffett, who has built a fortune over the decades with a buy-and-hold strategy, says that investors should take a long-term approach to investing. That can mean taking the bumps as they come, including those caused by public health emergencies like the coronavirus.

"We're buying businesses to own for 20 or 30 years. We buy them in whole, we buy them in parts ... and we think the 20 and 30-year outlook is not changed by the coronavirus," Buffett said.

"You don't buy or sell your business based on today's headlines," he added. "If it gives you a chance to buy something you like and you can buy it even cheaper, you're in good luck."

How 'stillness' can bring financial success

Video by Jason Armesto

There are many events or factors that can cause the markets to go up or down on a daily basis. The S&P 500 has fallen more than 3% on four different days this week, something that historically happens just four times every year.

Regardless of what's dragging the markets down — seasonal dips, bad weather, or a public health emergency — it's a good idea to do your best to keep saving and investing, Jason Lambert, the president and CEO of Northwest Financial & Tax Solutions, near Portland, Oregon, told Grow last fall.

The headlines may affect the markets, but you're probably better off not reacting to every twist and turn. "Stick to your plan," Lambert says. "You can weather the storm."

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