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U.S. stocks are slipping as investors weigh rising tension between Russia and Ukraine.
The Dow Jones Industrial Average slipped more than 270 points Tuesday as traders weighed how the ongoing situation between Russia and Ukraine would impact the global economy. The S&P 500 Index, meanwhile, fell about 0.6% and the tech-heavy Nasdaq Composite traded down nearly 1% around midday.
The Russia-Ukraine conflict has been a source of major market pressure recently, spurring back-to-back losing weeks on the major averages.
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While this kind of stock price action can be nerve-wracking for investors, especially those near or in retirement, financial advisors generally advise staying the course through market volatility.
Volatility is normal
All investors should accept market volatility — which is relatively common — as a normal part of the process of investing and the best way to outrun inflation, said certified financial planner Brad Lineberger, president of Carlsbad, California-based Seaside Wealth Management.
“Embrace the volatility, because it’s why investors are getting paid to own stocks,” he said.
This means investors should stay calm even through extreme movements. While stocks always move up and down, long-term market returns are still based on the same things: dividend yields, earnings growth and change in valuation, according to Zach Abrams, a CFP and manager of wealth management at Shaker Heights, Ohio-based Capital Advisors.
Movements up and down can also be a good time to review your asset allocation. If you’re worried about a big drop, you could rotate part of your portfolio into some less-risky stocks to protect from a potential market correction, which is a drop of more than 10%.
Opportunities arise when stocks fall
When stocks fall, it can also be an opportunity to buy more and set yourself up for future gains, according to Abrams.
This is because when stocks decline from recent highs, they’re trading at a discount and will likely recoup losses at some point.
Continuing to put money in the market when it’s down as opposed to selling is a great way to make sure you don’t miss out on a reversal. Data shows that selling when the market falls can take you out of the game for some of the strongest rebounds.
For example, if you missed the best 20 days in the S&P 500 over the last 20 years, your average annual return would shrink to 0.1% from the 6% you’d have earned if you’d stayed the course.
Be prepared for emergencies
Of course, even if you know that stock market volatility can benefit you in the long run, financial advisors still recommend having a cash emergency fund on hand so that you can make it through a market meltdown without selling. This is especially important for retirees.
If the stock market falls, it’s better to spend the money in your emergency fund than sell assets at a loss that can’t be recouped, according to Tony Zabiegala, chief operations officer and senior wealth advisor at Strategic Wealth Partners, an Independence, Ohio-based firm.
This also keeps stock investments in the game for big turn arounds, which generally come shortly after market corrections or even smaller dips.
For example, an investor would have needed only three months to six months of living expenses in an emergency fund to avoid taking losses during the March 2020 meltdown, said Lineberger at Seaside Wealth Management.
This approach would have also kept investments in the market for the record-breaking rally stocks enjoyed after the pandemic slump.
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