Beginner’s Guide to Market Volatility

The upside of downturns: Why now is a great time to start investing

Twenty/20

If you're new to investing, getting started can feel daunting, especially right now.

The last few weeks have seen some of the biggest drops in the market since the 2008 financial crisis, as traders react to slowing global economic growth triggered in part by the fast-spreading coronavirus. The market recovered some losses early Tuesday, after steep drops forced three pauses in trading over the past week, but experts say investors should expect more turbulence in the weeks ahead.

If you're looking to invest for the long term, though, experts say now is actually a great time to get started. As Josh Brown, CEO of investment advisory firm Ritholtz Wealth Management, put it on Twitter over the weekend: "If you're under 60, the universe just gave you a gift this week. Use it." 

The gift is the ability to buy into the stock market at lower prices since experts predict, and history suggests, that the markets will recover as they have in the past.

Certified financial planner Mark La Spisa, president of Vermillion Financial Advisors in South Barrington, Illinois, agrees. "Stocks are on sale for 10% off right now," he told Grow, when the market was in correction territory. "The stock market is running a sale thanks to coronavirus, and people are able to get in at ... much better pricing than they were 30 days ago."

Here's how to take advantage as a new investor.

Make a plan to invest for the long term

When building an investment portfolio, define your goals from the outset and invest accordingly. If you're setting a goal like a comfortable retirement, for example, it's important to remember that the market will have ups and down over the course of several decades, and that's normal. While there are always downturns, historically each one has ended in an upturn.

Even what seems like a dramatic drop can seem less startling when put in perspective. Stocks fell into a bear market last week after 11 years of sustained market gains, and the transition was sudden. But bear markets themselves are not actually that uncommon. There have been four in the last four decades, and since World War II, markets have taken an average of 22 months to recover from each.

For a long-off goal like retirement or paying for your kids to go to college, that's the context you want to keep in mind.

"How you invest your money is a function of two major things. One is your capacity: your time frame and how much money you have," says Erika Safran, a certified financial planner and the founder of Safran Wealth Advisors in New York. "The other is your risk tolerance. If you're someone who psychologically is fearful and is consistently concerned, then you should invest in a manner that aligns with that." 

The smartest way to start is to buy index funds. Investing in individual stocks requires an understanding of industry trends that most casual investors simply don't have, Safran says. Even pros often get that wrong. Index funds allow you to lower your risk by buying into a investment basket that's already diversified.

Safran recommends investing in a global mutual fund and having money market funds and bonds as part of a balanced portfolio. That can help you manage risk and temper turbulence. 

"It won't make you richer in the long term," says Safran. "But what it will do is it will enable you to deal with the volatility of the market, because your portfolio will be less volatile than the equity market."

VIDEO1:5701:57
The difference between a bear market, a recession, and a correction

Video by Courtney Stith

Keep up regular contributions even when the market is rough

Experts agree that it's time in the market that will help you most, not timing the market.

That means you don't need to wait until the market starts to recover to start investing, or to try to figure out when it will. Instead, use a strategy called dollar-cost averaging, where you invest in regular intervals, regardless of the state of the market. Automating the process of investing allows you to take advantage of regular dips in the market, helping you average out your costs over time and protecting you from bigger market swings.

"When you have to make an active decision, then you will always be influenced by your emotions," says Safran. "Whether or not your emotions will win is another story, but you will be informed."

The stock market is running a sale thanks to coronavirus.
Mark La Spisa
certified financial planner, Vermillion Financial Advisors

No one knows how long the current bout of market turbulence will last or whether the worst of the sell-off is over. So there's no point trying to buy at the lowest point. 

"Finding that bottom is often luck, and you don't care about finding the bottom, nobody hits the bottom. You just want to hover around there," says Safran.

Instead, get in as soon as possible, because the earlier you start, the longer your money has to grow. And then be consistent. Safran says that the best strategy for new investors is to invest on a regular basis, whether it's monthly, weekly, or quarterly.

This episode will pass, even if it's impossible to know exactly when, says Mark Hamrick, a senior economic analyst at Bankrate: "For long-term investors, this jolt is a bump in the road that will eventually only be a memory."

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