Stock Market Selloff: What's Causing All the Volatility, and Should You Buy the Dip?
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If you were watching the stock market this week, you likely have whiplash.
The tech-heavy Nasdaq Composite dropped 5% Thursday, the index's biggest one-day percentage decline since June 2020. The S&P 500 slid 3.6%, and the Dow Jones Industrial Average, 3.1%. It was a major reversal from Wednesday, when stocks rallied and the Dow and S&P 500 — which track the performance of some of the nation's largest companies — saw their biggest daily gains since 2020.
When markets do a U-turn, it's easy to panic. But financial experts say market volatility like this is normal.
"These types of losses can and will happen when you're invested in equities," says Mychal Campos, head of investing at online investment advice company Betterment. If you're a long-term investor looking for growth in your portfolio, you probably don't have too much to worry about, he adds.
Here's what you need to know about this week's stock market swings.
What's causing the recent stock market volatility?
The stock market has been struggling for months as investors assess what inflation being at a 40-year high — and the Federal Reserve's response to that inflation — means for the future.
When inflation rises, the Fed tends to hike short-term interest rates to fight those rising prices, because higher interest rates make it more difficult for businesses and consumers to borrow and spend money. On Wednesday, the Fed announced it would raise its benchmark interest rate by a half percentage point, the biggest hike in more than two decades. The move followed a March decision to increase the rate by a quarter percentage point.
Looking forward, though, Federal Reserve Chairman Jerome Powell said the Fed isn't "actively considering" going further and raising rates by three-quarters of a percentage point. This seemed to cause investors some relief and the stock market to rally on Wednesday.
Thursday was a different story. Investors appeared to show more of their concern over rising interest rates. And while raising rates may help bring down your grocery bill, they do tend to crimp prices for financial assets, like stocks and cryptocurrency, as well.
Should I be nervous about the stock market?
Of course, market volatility may make you uneasy if you've invested your hard-earned money in stocks.
But the turbulence was somewhat also expected given how well stocks have been doing recently, says Charles Sachs, chief investment officer at Kaufman Rossin Wealth. During the early stages of the pandemic, the stock market hit record high after record high, encouraging new investors — many of them young — to pour their money into stocks (and even riskier assets, like crypto). While the stock market kept skyrocketing, experts warned that prices couldn't go up forever.
"Markets don't just go one direction," Sachs says. "You need to be embracing volatility when you're investing in the markets."
Remember: The average stock market return is around 10% annually in the U.S. But you don't get those returns "like clockwork," Sachs says.
In other words, there are up years and there are down years, and if you have a well-diversified portfolio and a strong, long-term investing plan, don't panic. Stick to the plan.
When the market drops, should I buy the dip?
Buying the dip is one of the internet's favorite investing tips, but experts caution that trying to time the market is risky. Few people are successful in actually predicting when the bottom of a dip is here.
A better strategy is dollar-cost averaging, which involves regularly investing a fixed amount of money into the market over time. Like with buying the dip, some of your cash will be held on the sidelines. But instead of waiting for the market to reach the bottom of a dip, you invest the cash at set time periods. For example, instead of saving up $100 monthly and investing it all at once when the market drops, invest that $100 once a month or once a quarter.
(If your employer takes a certain percentage of each paycheck to invest in your 401(k), you're already dollar-cost averaging.)
“Time is one of the best negating tools of risk possible,” Stephen Talley, chief operating officer at Leo Wealth, previously told Money about this strategy.
What should I do with my portfolio?
A major selloff like we saw this week is a good time to revisit your level of risk tolerance.
"If this kind of move makes you nervous, just know that these types of moves do happen," Campos says. "If you're uncomfortable with that, you should reduce your allocation to stocks."
Financial advisors recommend that your investment portfolio consist of a mix of stocks, bonds and cash with the allocation to each depending on your financial situation, goals and risk tolerance. Rob Williams, managing director of financial planning, retirement income and wealth management at Charles Schwab, recently told Money that for the average person with an investment horizon of 10 years or more, an 80% allocation of stocks and stock funds (both U.S. and international) is the most likely path to wealth.
In short, it's best to stay the course and remember that stocks go up over the long haul.
"If you're in it for the long term, you should expect some nice returns," Sachs says.
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