The stock market is volatile.
Sometimes it is more volatile than others. I think it is safe to assume the stock market will be more volatile in the future than it has been in the past.
What does this mean for long-term investors?
It means, among other things, that you should be careful about when you buy and when you sell.
If that seems simplistic, it is still the best advice for long-term investors.
On the sell side, plan on reducing your exposure in stocks at least five years before you need the money.
If the stock market zooms up, don’t be afraid to sell sooner than you planned.
The reason is in volatile markets the danger of a horrendous fall is greater now than it probably ever has been.
High frequency trading and other automated buy/sell systems can turn a small decline into to a free-fall (or light a fire under a small push up).
There’s no way to predict when prices will return after a dramatic rise or fall – they could come back quickly or not.
Likewise, if you are still more than five years away from needing the cash (typically at retirement) and the market does a nose-dive, don’t be afraid to pickup some bargains.
As market volatility increases, long-term investors must ask themselves if they have the risk tolerance to see five, even ten percent daily losses or gains.
Volatility simply makes investing in stocks more risky. If you have time to wait out extreme dips, you will probably be OK.
Traders may (or more likely, may not) make money in volatile markets, however long-term investors face disaster if they wait until the last moment to cash out of stocks.
Don’t put yourself in the position of needing the cash out of your investments in the near term (less than five years).