What goes up must come down. Including the stock market. Which can be anxiety-inducing, especially with your hard-earned retirement savings at stake. But market volatility (aka when your investments see significant price changes in a short period of time) comes with the territory.
What causes market volatility?
There’s no one reason. Everything from geopolitical tensions to monetary policy can affect markets. Uncertainty is another key factor. (See: the start of the pandemic in March 2020.) Earnings reports from major companies (think: Apple, Google’s parent company Alphabet, and Amazon) can also shift the way investors buy and sell stocks, causing volatility.
What are some recent examples?
In 2021, the market saw some pretty intense highs. Bitcoin’s value hit a record high of nearly $69,000 in November, and the S&P 500 (hint: an index that tracks the value of 500 big US company stocks) was up as much as 27% for the year.
2022 was a different story. January took investors for a ride — on Jan. 24, the Dow Jones Industrial Average (an index of 30 blue-chip stocks that investors watch to gauge overall market performance) lost more than 1,000 points. The S&P 500 dropped far enough to be in correction territory (aka when stock prices fall 10% from their most recent high). Only to rebound the same day. The month finished out to be the worst for stocks since March 2020.
What’s moving markets in 2023? A number of things. Like investors reacting to the Federal Reserve’s projected rate hikes and inflation.
That sounds…not great.
It isn’t. And when the market fluctuates, people tend to focus on their losses more than their gains (see: loss aversion). Here are a few things that can happen to your wallet when volatility strikes:
Your 401(k) balance could drop. Since your retirement account likely includes investments in the stock market, you could notice a change in your 401(k)’s balance. Don’t worry too much about short-term dips — you’ve probably got a ways to go before you need that money. And that’s valuable time that will ultimately grow your wealth.
Your net worth could get low. When your investment accounts fall, you might also see your net worth drop a bit. Hint: Your net worth is the total value of all your assets (including your investments), minus your debts. But remember, those losses are just on paper. You don’t actually lose anything unless you sell (not recommended).
People might start spending less. Own a business or side hustle? The stock market drop could affect your income. When markets are down, people tend to spend less. Mainly because they feel like they don’t have any money to spend.
Ouch. What’s my next move?
There are a couple of things you can do if you’re worried about the markets.
Stay invested for the long term. Your retirement account might be feeling the sting of volatility. But that money should be there for the long run. Over time, these bumps tend to even out. Staying invested can mean future gains will offset some of the losses right now.
Build up your emergency fund. If you’re not feeling great about the markets right now (or the economy in general), it might be time to bulk up your savings. Having a solid financial safety net will provide peace of mind.
Buy the dip, maybe. When the market is down, it can be a good time to buy into investments at a discount. Consider a dollar-cost averaging strategy, where you keep investing regardless of what’s going on in the market. Because buying when the market is down can help you offset buying when the market is up.
Stick to your plan. Whatever your financial goals are, keep investing accordingly. And get help from a pro if you need it. A financial planner can help you get clear on what your financial priorities should be and how to achieve them.
theSkimm
Stock market volatility can keep you up at night. But building your emergency fund and staying invested for the long term can help make it less of a worry.
Updated Jan 13 to include the most recent stock market trends.
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