Tariffs announced by President Trump on "Liberation Day" sent the major stock market indexes spiraling, with the S&P 500 (^GSPC +0.78%) joining the Nasdaq Composite (^IXIC +1.29%) in correction territory. A correction is a drawdown of at least 10% from a recent high.
Compounding wealth in the stock market requires holding shares in quality businesses through periods of volatility. It sounds easy on paper, but when your screen is flashing red and portfolio balances are falling, staying even-keeled is a tall order.
While investors can't avoid volatility outright, there are steps they can take to help overcome the anxiety that can come with a stock market correction, or even a bear market.
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Maintain a long-term time horizon
By far the simplest and most effective way to liberate yourself from the pressures of volatility is to take a step back and be reminded of what investing is all about.
The idea is to buy shares in companies and then benefit from their growth and the growth of the broader economy over time. But anything can happen in the short term. Economic cycles, geopolitical events, trade tensions, pandemics, and other challenges can throw a wrench in the market. However, periods of steady economic growth have more than made up for market downturns.
The stock market goes up more than it goes down, but it tends to be a staircase up and an elevator down. This means that when the market sells off, it can happen fast.
Zooming out and thinking long term makes it easier to avoid getting rattled by the day-to-day fluctuations in your portfolio.
Know what you own and why you own it
Investing in companies you understand provides the conviction needed to endure periods of uncertainty. By having clear investment theses for the stocks you own, you can avoid overemphasizing quarterly results and price action to focus on what the business needs to do to deliver on investment expectations and grow over the long term.
Investors who own shares in companies they don't understand are more likely to let volatility dictate their emotions, which can be a huge mistake and result in panic selling or chasing a stock when it is running up for the wrong reasons.
There's a great quote by Warren Buffett's mentor, Benjamin Graham, about the perils of relying on price action to make decisions:
Mr. Market's job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to.
The price of a stock merely reflects sentiment at a moment in time. During sell-offs, fear can beat down a stock's price, while during periods of overexuberance, greed can lead to lofty valuations.
By knowing what you own and why you own it, you can use Mr. Market as a tool rather than a definitive yardstick for measuring what a business is worth.
Consider dividend stocks
No matter your risk tolerance, owning dividend stocks can be a great way to collect passive income regardless of the market's performance.
A 2% or 3% yield may not sound like much when the market reaches new highs, but dividends can go a long way when the market is falling by providing a little bit of dry powder when there are stocks you'd like to buy on sale.
A good starting point when looking for dividend stocks is to browse the list of Dividend Kings. Dividend Kings are companies that have paid and raised their payouts for at least 50 consecutive years. Such a track record is only possible for stable, profitable businesses such as Coca-Cola and PepsiCo.
While neither beverage giant is known for meteoric growth, the companies use dividends as a way to pass along profits to shareholders. Coke and Pepsi's established brands and international exposure give both companies plenty of product and geographical diversification. During economic downturns, consumers are more likely to delay big purchases or cut back on discretionary spending than stop buying the drinks and snacks from these companies.
Coke yields 2.9% and has 63 consecutive years of dividend raises, while Pepsi yields 3.6% and has boosted its payout for 53 years.
Keeping your cool
No one likes losing money or seeing their portfolio balance decrease. But how an investor responds to market volatility can make a world of difference in their long-term returns.
At times like this, it's best to remember Mr. Market's flaws. News headlines can move stock prices, but that doesn't mean you have to react with the same fear and panic that's driving market sentiment right now.
