After one of the wildest days for the stock market, here's what you should be doing

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Traders on the floor of the NYSE, Jan. 24, 2022.Source: NYSE

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Monday saw one of the wildest days of trading in many years, with the Dow Jones Industrial Average dropping roughly 1,100 points before rallying and ending the day fractionally higher. Stocks were lower again on Tuesday.

“Should I be worried?”

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That's a question on the mind of many investors this week.

While the volatility might scare some investors off, many experts say that this dip is the time to get in or the time to stay the course.

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I sat down with Kevin Simpson, founder and chief investment officer of Capital Wealth Planning and author of the new book, “Walk Toward Wealth,” for some answers.

CNBC:  Why are stocks dropping?

Simpson: Corrections are a normal course of market action, but they never feel good when you're in the middle of them.

Stocks are pulling back due to mixed company earnings and worries about rising interest rates.

The year is starting off with ominous signs. The winds have changed. The Fed is not only raising rates, they will no longer be pumping money into the economy. A lot of that money has found its way into the stock market. 

CNBC:  The S&P 500 dipped into correction territory on Monday. Should investors be worried?

Simpson: A 10% move in the market is not a cause for concern. We have just become spoiled in the last few years due to the ocean of easy money that has been made available by the Fed. What's unusual is how long it's been between corrections: 5-10% corrections happen very often, about once a year since the end of World War II.

Fortunately, the market usually bounces back fast from these modest declines.

Declines in the S&P 500 since 1946

Decline # of declines Average time to recover in months
5%-10% 84 1
10%-20% 29 4
20%-40% 9 14
40%+ 3 58

Source:  Guggenheim

CNBC:  Could we see it drop even more?

Simpson: Short-term, the key is the Fed commentary on Wednesday. The good news is the Fed now has the market's attention. Investors have come to believe that the Fed is going to raise rates very aggressively. So if they just indicate they will be raising rates gradually, that it's likely there will be only 3-4 small hikes this year, the market is likely to be relieved.

CNBC: What should investors be doing now?

Simpson: Long-term investors should know they cannot pick a bottom. A 10% decline is a good entry point. The biggest mistake investors can make is to use these declines as reasons to leave the market. I am an active manager, but retail investors should continue to own index funds as core holdings, like the Vanguard S&P 500 ETF (VOO) – and utilize dollar-cost-averaging. 

The key is not to try to time the markets. I know many successful investors, I don't know many successful traders. The retail investor tends to underperform the professional investor because they allow emotions to rule their investment decisions. Stay the course and look long-term is always the lesson.

CNBC: What kind of returns should investors expect in the next few years?

Simpson: The S&P 500 has seen unusually large gains in the last 12 years since the Federal Reserve began pushing interest rates down while simultaneously pumping money into the economy. That is now reversing, so it's reasonable to expect returns to be below-average for the next few years.

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Investors should expect single-digit returns, not double digit returns. That lends itself to the importance of dividends, because a 2 percent or 3 percent dividend could be very impactful with those kinds of returns.

The key is earnings. As long as we have earnings growth stocks can go higher even in the face of Fed tightening, providing they are not too aggressive.

CNBC: If I'm over 60 years old and I am concerned about a steeper market decline than 10%, should I be doing anything?

Simpson: If you are over 60 and are a more conservative investor, you want to be very cognizant of how much risk you're comfortable with. However, 60 is very young for this generation. People who are 60 today are going to be living into their 90s and beyond, so they will have a long investment life after they retire.  That means you have to be in stocks for longer. If you are 60 years old, your time horizons are not as short as you think they are.

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