Are you afraid of the stock market? Make this smart investment move before it’s too late

The stock market entered a roller coaster race on Friday, initially dropping dramatically to continue the weakness it suffered most of the week. But the last hours of the session showed a great upward movement. At the end of the day, earnings for the Dow Jones Industrial Average (DJINDICES: ^ DJI), S&P 500 (SNPINDEX: ^ GSPC), and Nasdaq Compound (NASDAQINDEX: ^ IXIC) reached 2%.

Data source: Yahoo! Finance.

This week gave investors a small taste of what it’s like to experience a small slowdown in the market. For the shareholders of some shares, however, it is more like going through a bear market. If you were more frightened by the stock market than you expected, Friday’s high was good news because it gave you the ability to find an investment strategy more in line with your needs and goals. Wait too long, though, and it may be too late to make changes before your current situation does real damage to your portfolio.

Changing the way you deal with volatile markets is not admitting defeat. Image source: Getty Images.

Can you really handle the volatility of the stock market?

Many investors have a mindset that allows them to embrace volatility. When you are starting out, for example, you usually have only a small amount to invest. With relatively little at stake, it is much easier to put your trust in long-term growth action with aspirations to become the next trillion dollar company. If it goes wrong, you have lost only a small amount.

As you become successful in your investments, however, things change. The size of your investment accounts increases and, suddenly, volatile markets can have a huge daily impact on your finances. Consider this: if you are lucky enough to accumulate $ 1 million in your investments, a 2% movement as we saw in the current market action means $ 20,000 more in your pocket. Most people take months to earn that kind of money.

As good as it is to achieve a big win, it is much worse when you are losing $ 20,000 or more on a bad market day. And with many of the high-growth stocks that have been the most popular these days, you will face much worse than that. At its worst levels today, the Nasdaq has dropped nearly 13% from its highs less than a month ago. Even so, it recovered more than 4% of that loss at the end of the day.

Be honest with yourself

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

Therefore, you have two options. One is to keep your investments the way they are, but to figure out how to cope with the volatility of the stock market. This is probably the best path for many to take, especially if you have a lot of time before you need the money you are investing. Enduring the 40%, 50% or even 70% drops that some high-growth stocks saw from their highs just a few months ago is not fun, but it is part of the revenue to take advantage of the strong long-term returns they offer.

The other is to reduce your portfolio’s exposure to a level that you can manage. You will have to sacrifice part of your potential return that way. But now is not a terrible time to do that, because Dow and S&P are not far below their recent record levels.

Make a choice and stick with it

Now is the time to make a choice. Once you decide, stay committed to your course of action. The worst thing you can do is switch between strategies. That way, you will have the worst of all worlds.

It’s not a bad thing to admit that you don’t have the risk tolerance you thought you did. If making a move now saves you from making a big mistake after a stock market crash, then it will have been worth the effort.