When the news is about the daily ups and downs of the financial markets, I find it hilarious. These movements in the financial markets are reported by financial news stations with the same fervour and enthusiasm as if our very lives depended on them. The reality, though, is a lot less rosy. Unless you’re a day trader, someone who seeks to make money by holding financial instruments for only one day, the ups and downs of the financial markets each day aren’t all that relevant.
Nowadays, most people have some sort of retirement savings plan, such as a 401(k) or an equivalent. The phrase “dollar cost averaging” refers to spreading out contributions over time in order to smooth out the impact of short-term volatility in the financial markets on the long-term development of an investment like a 401(k). Please allow me to explain: if the market drops this week, say by 2%, your 401(k) contribution will be able to buy 2% more shares (i.e. the price per share might be lower). In this case, if the financial markets rise the next week, the value of the shares you bought the week before will increase. The stock market inevitably declines, and this cycle continues indefinitely. I could prove that to you mathematically, but it would be tedious, so please just trust me on this.
A daily change in the financial markets should only cause you anxiety on those terrible days when the markets tumble by an amount that makes newspaper and blog headlines. The most crucial thing right now is not to freak out and especially not to try to sell any sort of financial instrument. Avoid liquidating your 401(k) or other investments. If you do this, you will be effectively paying a high price to purchase and selling at a low price to sell. Any firm, but especially one dealing with money, would do well to avoid this. If you possess a 401(k) and decide to ride out the market downturn instead of cashing out, you may never recover the value of your account from the low it hit on the awful day.
So the next time the markets go up one day and down the next, you may take heart in the fact that this is good for your 401(k) and grin to yourself. Plus, never sell on a day when the financial markets are extremely volatile; this is the worst moment to sell.