The stock market is relatively volatile by nature and according to CNBC, recent dips like February's large single-day drop highlight the fact that volatility should be expected.
Machine trading, high-speed trades made by computer algorithms, has further exacerbated this problem by allowing massive sell-offs to happen quickly. Rather than panic-selling or following the herd in one direction or another, a more prudent choice is to pause and reflect on your current investment goals.
While the average investor might envision an active exchange floor with hundreds of traders yelling their orders, the reality is that much of modern-day trading happens automatically through automatic computer-based deposits and algorithmic trading. In fact, CNN explains that a typical day will see 50 to 60 percent of trades happening through machines and this can spike to 90 percent when markets are especially volatile. This surge occurs because many of the algorithms work on similar principles and once a specific buy or sell level has been reached it can create a cascading effect among many machines all over the world.
Rather than worrying about huge intra-day swings, typical investors should be comforted by the fact that while the market goes through both highs and lows, the major indices have risen dramatically over the length of their history. A solid strategy, therefore, is often to hold index funds over a long time frame to wait for that appreciation. Of course, this strategy relies on when the investor plans to need access to that money in the future. If the answer to that question is less than five years, such as a senior getting ready to retire, then it would be safer to reduce the exposure to stocks in general. This helps avoid large swings with a sizable nest egg.
No matter the situation, speaking with a trusted financial advisor can help an investor put money in the right place to match their season in life.
A seasoned veteran will have already gone through many ups and downs during their career and will be able to separate fear from reality.
