Market volatility is as much of a part of the stock market as the stocks themselves. It's always been that way, and I'm willing to bet my last two quarters that it'll always be that way. For investors, the sooner you get comfortable with volatility, the better, because you learn not to let short-term movements affect your long-term investing strategy and goals.
Here's why market volatility should be an afterthought if you're a long-term investor.
Image source: Getty Images.
Don't let market drops make you panic-sell
Imagine if you were an investor in the S&P 500 and decided to sell your shares during the beginning of the COVID-19 pandemic when stock prices dropped. On March 20, 2020, the S&P was just above 2,300. However, as of May 25, 2022, the S&P 500 is around 3,960 -- even with the S&P 500 down over 17% YTD.
The same goes for the Nasdaq Composite index. During the pandemic, it dropped from over 9,731 to just above 6,879, yet as of May 2022, it sits above 11,300 -- while being down over 28% YTD. Abandoning your investments because of market downturns can not only be costly because of the potential taxes, but it can also take away from future gains. Panic selling can be pricey.
Time in the market matters
One of the best investing quotes to follow is "time in the market is better than timing the market." First, it points to the very real fact that timing the market is all but impossible to do consistently long term. Investors may think they can do it, but generally, all it takes is a bit of time to show them why that thought is misguided. On the other end, the quote showcases the huge role time can play in compounding your investments.
Compounding occurs when the money you make on investments begins to make money on itself, and it's largely responsible for how many people acquire their wealth. For compounding to work its magic, though, it needs time. And part of giving it that time is not abandoning your investments -- or making decisions that go against your better interest long term -- when you experience short-term volatility, regardless of how "extreme" it may seem at the time.
Embrace dollar-cost averaging
With dollar-cost averaging, you invest specific amounts at regular intervals, no matter what the stock's price is at the time. Dollar-cost averaging is a great investing strategy because it can take a lot of the emotions out of investing, which is particularly important during periods of high volatility because it's easy for investors to let their emotions impact their investing decisions.
How you'd prefer to break down your investments is all on you. It can be weekly, bi-weekly, monthly, quarterly, or whatever. What's most important is that you set a specific schedule and stick to it. If you have a set schedule, it's easy to ignore market volatility because it doesn't (or at least shouldn't) matter to you anyways. Think about your 401(k) plan: Each paycheck, money is taken out and invested into your elections, regardless of the investment's price at the time.
That's essentially how you want your investing process to work. Ignore short-term market volatility and keep your eyes on the prize with your long-term goals. You'll be glad you did.
