Upbeat music plays throughout.
Narrator: There's an old expression that goes, "The stock market takes the stairs on the way up but rides the elevator on the way down." When markets fall precipitously, volatility often spikes, and some investors may rush for the exit, causing a snowball effect.
Animation: Morningstar circle chart outlines 10 types of risk
On-screen text: Market Timing, Inflation, Credit, Industry/Company, Market, Interest Rate, Call/Reinvestment, Liquidity, Political/Economic, and Currency
Narrator: It can be scary, but market volatility is inevitable.
While it's hard to know when the selling will end, don't panic. Here are three considerations for navigating a market sell-off.
Number 1: Ignore the noise. Although past performance is not a guarantee of the future, historically, the U.S. stock markets have experienced numerous sell-offs, corrections, and even crashes.
Animation: Chart shows a 60% stock and 40% bond portfolio during five bear markets after one and six months, and one, three, and five years.
On-screen text: Cumulative U.S. returns following bear markets.
On-screen text: Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The chart shows the performance of certain periods following the trough of the last 5 bear markets. Stocks are represented by the S&P 500® Index, and bonds are represented by the Bloomberg US Aggregate Bond Index.
Narrator: Every time though, the market eventually rebounded and went on to make new highs.
Animation: Chart shows a 60% stock and 40% bond portfolio, an all-stock portfolio, and crashes.
On-screen text: Balanced Portfolio versus All Stock Portfolio
On-screen text: Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The hypothetical portfolio consists of 60% S&P 500® Index stocks and 40% Bloomberg US Aggregate Bond Index bonds; it is rebalanced annually, and dividends, interest, and capital gains are reinvested.
Narrator: Long-term investors can potentially benefit by buying good companies at lower prices.
Also, building a diversified portfolio over time can help protect against short-term volatility and avoid emotional decision-making, like selling at the bottom. Sometimes, the best action is no action.
Number 2: Be tactical. Short-term traders might consider taking profits on winners, while establishing firm exit prices for losers. If you're hesitant to sell, consider hedging. A hedge establishes a position that is designed to profit as other positions in your account lose value.
Strategies range from buying put options to selling futures contracts, among others. These strategies are more advanced, require certain brokerage account approvals, and are not suitable for all investors. Bottom line: If you're going to sell, be tactical.
Number 3: If you're bargain hunting, tread lightly. Stepping in to buy stocks in volatile markets is risky business. Instead of trying to pick the bottom, try to recognize when stocks have reversed course. Consider using technical analysis to help you identify potential trends, price patterns, and key support levels. Keep an eye on fundamental data like the price-to-earnings, or P/E, ratio, dividend yield, and other metrics to determine when stock prices might be attractive. And remember the old saying, "Don't try to catch a falling knife."
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