For an archive of The Daily Breakdown’s 5-Day Bootcamp, see the guide below:
Bootcamp Day 1: Picking a strategy
Bootcamp Day 2: Every strategy has a time and place
Bootcamp Day 3: Position sizing
Bootcamp Day 4: Trading around big events
Bootcamp Day 5: What to do during corrections
We had a few nasty days of selling pressure in early August, but luckily we’ve seen a pretty swift recovery. Nevertheless, that volatility spike left a few bruises on investors’ portfolios.
While the recoveries aren’t always quite this fast, we do know that large one-day spikes in volatility tend to be a good opportunity for long-term investors.
Whether the next sharp pullback is around the corner in spooky September or is down the road doesn’t really matter. Regardless of when it happens, investors should be prepared. Here’s how.
Have a plan
If you didn’t have a plan during last month’s volatility, now is a good reminder to make one for your current holdings and allocations. During a pullback, do you want to stay the course, add more, or sell?
For long-term investors, automated investing can make things easier. These investors are less worried about short-term dips, as they invest in monthly or bi-weekly increments with a focus on the long term.
Short-term investors may have more flexibility looking to take advantage of the dips, but they have to put in more effort and thought; they have to be more mindful of their investment decisions.
When volatility is increasing and the selling pressure is picking up, I like to write down what stocks (if any) that I am interested in, at the price I want to pay, and in the quantity that I am comfortable owning. It doesn’t have to be an all-in or all-out situation either — buying in increments is okay too.
This takes a lot of the stress out of the situation because I have already planned on what I want to do.
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Stay calm
Staying calm is a lot easier to do when you have a plan. Whether that’s long-term dollar-cost averaging or having a shopping list ready to go, some sort of game plan helps tremendously.
The other thing to remember? You don’t have to do anything when markets start to go haywire. Don’t feel pressured into participating when it doesn’t feel right. There’s absolutely nothing wrong with staying on the sidelines — particularly for active investors.
When volatility increases, so do emotions, and it can be hard to operate out of a highly emotional state. Panicking rarely makes us money.
The bottom line: Keep some perspective
Pullbacks and corrections are scary. No one is saying that they aren’t. But remember the long-term performance of the market.
It’s not unusual to have several up-years followed by a few bad quarters. And it’s common to have several 5% to 10% corrections a year. Over the last 50 years, the average intra-year correction is about 14%.
As bad as 2022 felt, keep in mind that the S&P 500 rallied 120% off its 2020 low, then fell 27.5% to its 2022 bear market low, and then rallied more than 62% in less than two years.
Sometimes the markets are due for a correction. Other times the economy forces one. Either way, realize that short of truly remarkable circumstances, US stock indices have done pretty well over the long term and sometimes we just need a little patience.