If you have money invested in the stock markets, cryptocurrencies, or just about any other financial assets, the two weeks starting on January 17 must have been terribly unsettling for you. At the time of writing this (January 25), major stock indices have lost between 8 percent to 10 percent, and some popular cryptocurrencies have lost about half of their value since their November peak.
Why have markets done this? Financial commentators have offered up an entire catalogue of reasons. These include the possibility of the Federal Reserve tightening monetary policy more than anticipated, inflation eroding companies’ profits, potential war between the US and Russia, and so on. Experts are also divided on how bad this market decline will be. Just look at CNBC and you will find as many optimistic forecasts as pessimistic ones.
The truth is, as with all dramatic market movements, it is difficult to pin down the exact reason behind the moves, or agree on what the future holds. After all, markets are a collection of individuals, each doing what they think is best for themselves.
Whatever the reason is, though, the fact is that markets tend to overreact, and things are really not as bad as they seem.
Think about it: the real economy is still doing quite well. There isn’t a surge of people losing jobs or falling behind on mortgage payments and losing their homes, or having trouble putting food on the table. So what can we learn from this bout of extreme market volatility?
At the risk of sounding repetitive, I remind you that as individual investors, we must think of the long game.
In the long run, markets trend up, and to best take advantage of this, a strategy of regularly investing in the markets is probably the best course of action for most people. A broadly diversified exchange traded fund (ETF), such as the SPDR S&P500 ETF (ticker code: SPY) remains my recommendation for implementing this strategy.
Secondly, do not invest money that you know you will need in the short term, because you may be forced to sell at the worst possible time.
Finally, have a good money plan. If you have set aside an emergency fund and allocated money for different needs as well as investing, then you can sleep well knowing that whatever happens in the market, you will be able to go about your daily life as normal.
The volatility in markets is likely to continue for the rest of 2022, but stay calm and follow your plan. I can guarantee you that this will not be the last time markets decline dramatically in your lifetime, so learn from the experience and you will be better prepared in the future.