Market Volatility and Investment Strategies
“Everyone has a plan,” boxer Mike Tyson once remarked, “until they’re punched in the mouth.” These days, it seems investors are trying to sidestep a lot of the hits. The announcement of President Donald Trump’s tariffs back in April nearly pushed markets into Bear territory, and there’s been quite a public disagreement between him and the Federal Reserve chair regarding interest rates. Plus, inflation is sticking around longer than expected.
Despite all this, the S&P 500 has actually climbed over 8% since the beginning of the year.
However, there’s always the looming possibility of stocks dropping, which can rattle potential investors. In this uncertain environment, some long-term investors might panic and sell off their shares to salvage what they can.
David McInnis, a certified financial planner and managing partner at Aristia Wealth Management, emphasizes the importance of having a strategy ready for tough market conditions.
“A strong technique to handle market volatility is dollar cost averaging,” he told CNBC Make It. This strategy involves consistently investing a fixed amount of money over time, allowing for automatic contributions to brokerage accounts and utilizing 401(k) plans via payroll deductions.
“It may not be groundbreaking,” McInnis acknowledges, “but it works.”
Understanding Dollar Cost Averaging
Consider how you would navigate the market when it’s soaring versus when it’s in a slump, and reflect on your investment habits.
In an ideal world, I would buy more shares when stocks are cheaper and cut back when they’re pricey. However, many investors don’t seem to operate that way, as noted by Kelly Lavigne, vice president of consumer insights at Allianz Life.
“When the market is doing well, people are eager to invest. Conversely, during downturns, they’re often too cautious,” he mentioned. “This behavior goes against what they should be doing.”
Using dollar cost averaging allows investors to overlook the market’s short-term fluctuations by committing to regular investments, which means you’re buying more shares during price dips and fewer during peaks.
“Having a habit of consistent investing is a great discipline,” Roger Young, a leadership director at T. Rowe Price, pointed out. This consistent approach can be particularly beneficial during market declines.
Historically, the market has tended to recover after challenging times. The S&P 500 has dipped into Bear territory—a drop of 20%—27 times since 1928, and on average, it has taken just under 10 months to bounce back.
In essence, dollar cost averaging enables you to buy stocks in various market conditions. For younger investors, this can be a crucial tool for wealth building, according to McInnis.
“If only I could go back to my 20s and 30s and really heed that advice, ignoring the market’s ups and downs,” he reflects. “Now is the perfect opportunity to keep investing, especially when there are significant market challenges.”
