2017-05-18 / The Motley Fool

Fool’s School

Expect Volatility

One of the most important things to understand about the stock market is that it can be volatile, especially over short periods. On June 24, 2016, for example, the Dow Jones Industrial Average (“the Dow”) dropped about 538 points, or 3 percent, after Britain voted to exit the European Union. (It’s important to consider such moves in terms of percentages. A 100-point surge might seem like a lot, but that would be just 0.5 percent today.)

Big moves in the market can startle us and sometimes lead us to make mistakes. Keeping the following points in mind can help:

First, know that the Dow is an average representing only 30 companies out of many thousands on the American markets. For a better measure of our stock market, look at the S&P 500 (with 500 of America’s biggest companies, representing about 80 percent of the overall market’s value) or the Wilshire 5000, which represents the “total stock market” and encompasses thousands of U.S. companies.

A falling market isn’t necessarily bad. It can present great opportunities, with many great companies’ stocks suddenly on sale. If you’re 20 years away from retirement, for example, how much does it matter that your holdings fell 2 percent this week? What really matters is how they’re valued in 20 years or whenever you want to sell them.

The prices at which you buy and sell are the only ones that give you an actual profit or loss. As super-investor Warren Buffett has explained, if you’re going to be buying more shares of stocks in the coming years, you should be happy to see falling prices.

Money you expect to need in the next five (or even 10) years, though, might be better parked in savings accounts, money market accounts or CDs.

Successful investors need to avoid giving in to fear or greed when the market moves sharply. Expect healthy stocks to fall sometimes, and to recover eventually. The stock market may be volatile, but over long periods, it has always risen. ¦

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