The US stock market has been volatile so far this year. It’s as if investors wake up feeling nervous but then everyone changes their minds over the lunch break.
The US Dow Jones and S&P 500 Index briefly fell into correction territory last month before bouncing back.
The tech-heavy Nasdaq Composite Index remains in correction territory, at about 14% below its recent peak.
However, market corrections – defined as a 10% pullback from a recent high – are healthy and quite common during any bull market.
Just because a correction has occurred doesn’t necessarily means that an even worse pullback is coming.
Meanwhile, Wall Street’s fear gauge, the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), rose to a 15-month high of 38.94 in January amid a plunge in stock prices.
This has been mainly due to rising inflation, potential rate hikes by the US Federal Reserve (Fed) and the unwinding of the monetary policy stimulus, all of which have unnerved investors.
But regardless of the direction of the stock market in the near term, here are four reasons why you shouldn’t worry about a crash.
1) The stock market will rebound
While it is difficult to see the light at the end of the tunnel when the market is on a downtrend, investors need to remember that the stock market has a long history of recovering from a market crash.
For example, the S&P 500 has experienced a bear market more than 20 times since the 1930s but it rebounded eventually every time.
2) Timing the stock market is impossible
Even the smartest Wall Street investors won’t know if the market will be up or down tomorrow.
Of course, technical indicators help you to follow a certain trend, but no one can say exactly when the stock market will crash or when prices will bottom out.
A more suitable strategy would be to put your money into the stock market through dollar cost averaging (DCA) as it ensures that emotions don’t control your investment decision-making process.
You can read my colleague Tim’s article on Dollar Cost Averaging here.
3) The economic recovery story continues
One of the positive takeaways is that the US economic recovery story continues to remain intact.
The US economy created far more jobs than expected in January despite the disruption to consumer-facing businesses from a surge in COVID-19 cases.
This points to an underlying strength in the economy even as the Fed looks to hike interest rates.
4) Focus on the long-term goals
Unless you’re nearing your retirement, or if you have invested too much money into the stock market, you should continue to focus on your long-term financial goals.
You shouldn’t let emotions like fear and greed to change the course of your action.
An easy strategy to reduce making investment decisions based on emotion is to stick with a certain asset allocation strategy.
I’ve previousy written about five asset allocation strategies that help you to build a resilient portfolio.
Be the intelligent investor
Market dips can be daunting for investors whether you’ve just started this journey or if you’re a seasoned investor.
Instead of following the panicking herd over the cliff, be the intelligent investor who sticks to an investment strategy that focuses on the long-term outlook as well as building a resilient portfolio.
Instead of fear-based selling, use a bear market as an opportunity to buy more quality companies or ETFs.
Instead of buying the next hot stock, focus on companies with strong track records, solid fundamentals and financials, competent management teams and that are proven leaders in their industry.
