When the share market drops suddenly it’s only natural to feel uneasy. Investors feel confident when markets are rising, while falling markets uncover those who are risk averse. The fact is, it’s completely normal for markets to fall. Typically, markets recover quickly and over time, the rises outweigh the falls. A rising market is called a Bull market, while a falling market is called a Bear market. Over the last 92 years in the US share market, Bull markets averaged 6.6 years in length while Bear markets averaged 1.3 years in length. The most recent Bull market lasted nearly 11 years, so we were well overdue for a fall.
One of the fundamental principles of investing is to always have enough cash on hand for short-term needs. You will then be able to ride out the market volatility. A fall in the market only becomes a loss when you need to sell at the wrong time. While it might seem logical to pull money out at the onset of a Bear market and put it back in when the market starts to rise again, this is almost impossible to do in practice. Even experts can’t pick the turning points in a market until well after the event, by which time it is too late. When markets pick up again, they can rise in value very sharply and those who are not invested will miss out on these gains.
For investors who make regular contributions to their portfolio, volatility is good news. As the market falls, investments are purchased at lower prices. Investing small amounts over a longer time frame is less risky than investing a single lump sum on one day, as the price paid will be an average over time rather than a specific price on a single day.