Here’s why it’s important to stay invested when the stock market drops

Amid stock market volatility, it’s critical to avoid emotional moves that could stunt long-term portfolio growth, financial experts say.

U.S. stocks on Monday plunged as part of a global selloff fueled by U.S. recession fears. The U.S. dip followed a more than 12% drop for Japan’s Nikkei 225, its biggest one-day loss since Wall Street’s 1987 Black Monday crash.

The Dow Jones Industrial Average earlier Monday fell by more than 1,200 points but recovered slightly to 1,032 points, or 2.6% down, by about 3 p.m. ET. Meanwhile, the Nasdaq Composite dropped 3.9% and the S&P 500 lost 3.2%.

“Don’t panic and make some crazy, rash decision that veers away from your game plan,” warned certified financial planner Lee Baker, owner of Apex Financial Services in Atlanta. 

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Some investors are prone to panic-selling during periods of volatility and then often miss the stock market recovery with cash sitting on the sidelines, research shows.

“The rollercoaster ride back up happens just as quickly,” and missing recovery days “can crater your portfolio,” said Baker, who is also a member of CNBC’s Financial Advisor Council.

To that point, missing the 20 best days in the stock market from Jan. 1, 2003 to Dec. 30, 2022, would have cut your total portfolio returns by more than one-half, according to J.P. Morgan.

Ultimately, staying invested pays off long-term because “it’s a loser’s game” to try and time the market, Baker said.

During periods of market volatility, it’s important to focus on what you can control, rather than broader economic uncertainty, said Douglas Boneparth, a CFP and president of Bone Fide Wealth in New York, who is also part of CNBC’s Financial Advisor Council.

Your existing cash reserves, for example, can cover emergencies or provide funds to “take advantage of opportunities,” he said. “This is the number one thing that can allow people to sleep better at night.”

While many experts suggest keeping three to six months of living expenses in cash, Boneparth recommends six to nine months, which “lends itself to staying the course” after stock market dips. If cash reserves are low, it may be a good time to revisit plans to rebuild.

One benefit of extra cash is you could use some of the funds to buy discounted assets after a market downturn, depending on your goals, he said.

“I’ve never come across someone who was upset that they had a little bit more cash than they needed,” Boneparth added.