Afraid of the stock market? Let this smart investment move before it’s too late

The stock market began a rollercoaster ride on Friday, initially declining sharply to continue the weakness it suffered most of the week. But the last few hours of the session were a big step higher. At the end of the day, profits for the Dow Jones Industrial Average (DJINDICES: ^ DJI), S&P 500 (SNPINDEX: ^ GSPC), en Nasdaq Compound (NASDAQINDEX: ^ IXIC) amounted to as much as 2%.

Data source: Yahoo! Finance.

This week, investors gave a small taste of what it is like to undergo a small downturn in the market. For shareholders in some stocks, however, it was more like going through a bear market. If you were more afraid of the stock market than you expected, the rise of Friday was good news as it gave you the ability to find an investment strategy that better fits your needs and goals. However, waiting too long, and it may be too late to make changes before actually damaging your current portfolio.

Changing the way you handle volatile markets is not a defeat. Image Source: Getty Images.

Can you really handle the volatility in the stock market?

Many investors have an attitude that enables them to accept volatility. Once you start, you usually only have a small amount to invest. With relatively little at stake, it’s much easier to put your trust in a long-term growth stock with the aspiration to become the next trillion-dollar company. If it goes bad, you have only lost a small amount.

However, as you become successful with investments, things change. The size of your investment accounts is getting bigger, and suddenly volatile markets can have a huge impact on your finances on a daily basis. Think about this: if you are lucky enough to raise $ 1 million in your investments, a 2% move as we saw in the current market action will mean $ 20,000 more in your pocket. It takes most people months to earn that kind of money.

No matter how good it is to get a big win, it feels much worse when you lose $ 20,000 or more on a bad market day. And with many of the high-growth stocks that have been the most popular lately, you will have to endure much worse than that. At its worst levels of today, the Nasdaq was nearly 13% lower than less than a month ago. Yet by the end of the day, it had fallen back more than 4% of the loss.

Be honest with yourself

What happened this week was a relatively moderate decline compared to what could happen in the stock market. The Dow is less than 2% below its everyday highs. So if this week has made you nervous, the bad news is that it could get a lot worse.

So you have two choices. One is to keep your investments as they are, but determine how you can live with the volatility in the stock market. This is probably the best course for many to follow, especially if you have a long time before you need the money you are investing. Enduring the 40%, 50% or even 70% drop that some strong-growing stocks saw at their peak just a few months ago is not fun, but it’s part of the recipe to enjoy the long-term returns present them.

The other is to reduce the exposure to your portfolio to a level that you can manage. You will have to sacrifice your potential return in this way. But this is not a terrible time to do so, as the Dow and S&P are not that far below their recent record levels.

Make a choice and stick to it

Now is the time to make a choice. Once you have decided, stay committed to your way of action. The absolute worst thing you can do is switch between strategies. This way you get the worst of all worlds.

It’s not bad to admit that you do not have the risk tolerance you thought you would. If you are now preventing yourself from making a big mistake after a stock market crash, it would have been worth it.