Fear is gripping Wall Street once again. After a long weekend, the nearly 122-year-old Dow Jones Industrial Average (^DJI -1.71%) and broader-based S&P 500 (^GSPC -1.51%) opened the new week with a nominally gut-wrenching drop of 459 points and 59 points, respectively. Though the 459-point decline in the Dow failed to break into its 20 largest single-day point dives in history, the 59-point dip in the S&P 500 on Monday did register as its 19th-largest single-day point drop of all time.
As a whole, volatility has become all too common over the past two months. Four of the nine largest single-day point declines in the Dow have occurred since Feb. 2, with five of the 19 biggest single-day drops in the S&P 500 occurring over the same time frame. Both indexes are now currently in correction territory -- i.e., down at least 10% from a recent high.
Smart investing strategies to employ during a correction
In many ways, this heightened volatility, which saw the CBOE Volatility Index hit a nine-year high (briefly) in February, may have some people questioning their investing resolve. However, running for the exit now wouldn't be a prudent move. With an historic annual return of 7%, inclusive of dividend reinvestment and when adjusted for inflation, the stock market remains one of your top investment choices.
So, how should investors approach putting their money to work during a stock market correction? Here are five strategies to consider to put your mind at ease.
1. Buy an index fund
The first option, while boring, is historically proven to work: Buy an index fund, such as the SPDR S&P 500 ETF (SPY -1.55%). An index fund will often very closely mirror the index that it tracks, which in the case of the SPDR S&P 500 ETF is the broader S&P 500 index. With the exception of a small annual net expense ratio of 0.0945%, an index fund is an exceptionally cheap and easy way to stay invested and diversified.
Best of all, of the 36 stock market corrections in the S&P 500 since 1950, 35 of those 36 -- all but the current correction – have been erased by a bull market rally, often within a matter of weeks or months. That's 35 for the previous 35. You simply won't find better investing odds than that with the SPDR S&P 500 ETF.
2. Purchase an exchange-traded fund
Another idea? How about purchasing an exchange-traded fund (ETF) in an area of the market that piques your interest. Purchasing an ETF gives an investor access to instant diversification within an industry or sector, based on market cap or even on geographic location. There are well over 1,700 ETFs available to be purchased in the U.S. alone, as of July 2017, offering the retail investor customization and diversification to his or her heart's content.
3. Buy dividend stocks
Next, strongly consider purchasing dividend-paying stocks. Dividend stocks often act as a beacon for investors during rough patches in the market. They usually have time-tested business models that allow them to pay a dividend with regularity, and the stipend being paid can be used as a means to somewhat offset regular stock market declines. Most importantly, dividend payments can be reinvested back into more shares of dividend-paying stock -- known as a dividend reinvestment plan -- which can be used to accelerate wealth creation.
4. Add to what you already own
As for a fourth strategy, consider adding to what you already own. A stock market correction is a great time to review your holdings and ensure that the reason(s) you bought into a stock in the first place still hold true. If your investing thesis hasn't changed, and your holdings have dropped in value along with the rest of the market, it might be a smart idea to add to your existing position. In other words, if you believed in those stocks when the market was 10% higher, and nothing has fundamentally changed about their business models during this correction, you may be doing yourself a disservice by not adding to your positions.
5. Invest in regular time intervals
Lastly, try investing in the stock market in regular intervals, regardless of whether the indexes are screaming higher or lower. Investing once a week, every month, or once a quarter, as an example, can reduce or eliminate the anxiety that comes with trying to time the market. What's more, averaging into your positions over an extended period of time should help create a favorable cost basis that results in you making money over the long run.
Long story short, investing doesn't have to be complicated, especially during a correction. Stick to the basics, think long term, and everything should be just fine.