The stock market is off to a bad start this year.
The S&P 500 — a benchmark commonly used to measure the overall stock market — was down 5.3% in January, making it the index's worst month since March 2020. The Nasdaq Composite also experienced its biggest one-month decline since March 2020, falling 9% in January, and the Dow Jones Industrial Average fell 3.3% for the month.
January was a volatile month for stocks as investors grappled with the Federal Reserve's anticipated interest rate hike. If the rollercoaster ride made your stomach lurch, that's understandable. But dips in the markets are part of investing, and a well-diversified portfolio set up for the long term can weather the volatility we're seeing now.
What's next for the stock market?
The poor January performance may be scary if your eyes were glued to your trading apps, but it was also somewhat expected, says Anjali Jariwala, certified financial planner and founder of FIT Advisors. Stocks kept climbing to new records since their March 2020 low, and when prices are that high, a downturn isn't all that surprising. Many investing experts have been saying that a market correction could be inevitable.
When it comes to the anticipated interest rate hike by the Fed, remember that rate cycles are normal, and the central bank's hawkish position should provide some comfort as the Fed focuses on getting inflation under control, Seth Wunder, chief investment officer of investing app Acorns told Money via email.
Historically, markets actually do well during rising rate cycles, with the S&P 500 delivering positive returns in 11 of the 12 Fed rate hike cycles since the 1950s.
Remember: This isn't the first time the market has dipped, and it won't be the last. By August of 2021, the S&P 500 was up 100% compared to its March 2020 low.
What should investors do now?
A long-term investor should not view the dips as a reason to make big changes to their investments, Jariwala says. Instead, they should use this time to rebalance their portfolio and confirm their asset allocation still aligns with their risk tolerance and time horizon for needing the money, she adds. (Rebalancing refers to when investors sell investments that have increased in value and replenish investments that have decreased in value to get their portfolio back to holding its target weights.)
Highly speculative assets have benefited from the Fed's willingness to keep interest rates low for so long, but as that changes these risky assets — cryptocurrency, for example — may be the first assets to be impacted, Jack Ablin, chief investment officer and founding partner at Cresset Capital previously told Money. If you're invested in speculative assets, it might be time to take some of that risk off the table, he added.
If you're concerned about your retirement accounts, like your 401(k), remember that most of them invest in funds that lower risk and insulate against some degree of market volatility, says Edward Gottfried, director of product at Betterment's 401(k) business.
"Retirement is a long-term investment, meaning that everyday volatility won’t have a significant impact on your future retirement security," Gottfried adds. Changing your portfolio allocations is actually shown to lead to worse performance, and your 401(k) is more likely to recover returns if you stay the course, he says.
Overall, it's best to invest in a way that allows you to stick to your plan, rather than in a way that makes you feel the need to take action every time the market dips.