When you're used to stock values going nowhere but up, a blip can be enough to induce panic. And this week's volatility was no doubt enough to make some investors very nervous.
On Thursday, stocks fell sharply as an uptick in bond yields pushed investors toward a sell-off, with the Dow dropping 1.8% and the S&P 500 shedding 2.5% of its value. But while that sudden bout of volatility may not have been something to celebrate, it also didn't spook me at all. Here's why.
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1. I'm not selling stocks anytime soon
There's really only one way to lose money in the stock market -- sell off investments at a price that's lower than what you paid for them. If stock values fall but you leave your portfolio untouched until they recover, you won't lose a dime. I make a point to follow that very rule whenever the market takes a tumble, and I intend to uphold it this time around.
To be clear, this isn't to say that I won't ever sell a stock at a loss. But I'll do so on an individual basis, not as a reaction to general market conditions. For example, if there's a single company in my portfolio that's been underperforming and I don't see its individual share price coming back up, I might make the decision to take a loss and use it to my advantage regarding taxes. But otherwise, my policy is to sit tight when stock values drop.
2. I have plenty of savings to fall back on
It's one thing to say you won't sell stocks at a loss during periods of market volatility, but it's another thing to be forced to do so when you need to liquidate positions for money. That's a situation that sometimes can't be helped, but I've made lots of sacrifices to prevent that.
Specifically, I've amassed enough of a savings account balance to cover about a year's worth of living expenses. That's well beyond the threshold for emergency savings a lot of people advise, and it's also a lot of money that I don't let myself use, even though I'd like to. But having that cushion gives me the option to ride out extended market downturns, all the while helping me keep my cool in the face of short-lived volatility.
3. If the market doesn't recover, I'll use it as an opportunity
It's too soon to tell if this week's volatility is a sign of things to come or a temporary setback. But if it ends up being the latter, I plan to capitalize on it -- namely, by adding some new stocks to my portfolio once they're available at a relative discount. Buying stocks has been a challenge lately since they've been so overvalued, but if the market takes a turn for the worse in March, I'll use it an opportunity to pounce.
Stock market volatility can be very unsettling, even for seasoned investors who have been through it before. But the events of the past week didn't shake me, and they shouldn't mess with your head, either. As long as you don't start unloading stocks in a panic, you, too, can ride out the latest sell-off without getting hurt financially.
