This has been a tumultuous time for the financial markets, to say the least. The S&P 500 has slipped into bear market territory, and most other major indexes are down sharply from their recent highs. However, it’s essential to keep things in perspective, especially if you’re a relatively new investor. Market corrections, bear markets, and even stock market crashes are a normal part of long-term investing and can be expected to happen periodically.
- Making sense of market corrections and crashes
- Market corrections are defined as a drop of 10% or more from previous highs, and they happen about once a year historically. Bear markets, typically defined as a 20% drop, occur every five years or so. The 2007-2008 Great Recession, for example, saw the S&P 500 plummet by over 50% before it finally bottomed out.
While market corrections and crashes are a normal part of investing, how you handle them can have a significant impact on your long-term results. With that in mind, here are three smart moves you can make during a stock market downturn like this, and one mistake that’s incredibly important to avoid.
Doing Nothing: A Great Day to Wait
One of my favorite things to say to myself, as well as to clients, when the market gets extremely turbulent is, “Today is a great day to do nothing.” Unless I need to see the news for writing purposes, I’ll often turn it off when the market is really volatile. Even if I see a stock I want to buy trading for a relatively cheap price, I’ll often wait and let the dust settle before doing anything.
- The market will quickly rebound and I’ll miss out, but the rest of my portfolio will go back up.
- Things will fall even further, and I’ll get a better opportunity.
The tariff situation is a great example of this. The S&P 500 fell by about 5% the day after the announcement, but if you had waited a couple more days, you could have capitalized on another 7% downside.
Looking for Bargains: A Time to Put Money to Work
While it’s perfectly fine to do nothing at all in a market downturn, it can also be a good idea to start looking for places to put money to work. That’s especially true when the market has already fallen into bear market territory, like now.
- Historically, a drop of 20% or more from the highs has been a great time to put money to work.
- The point is that if you’re a long-term investor, a bear market can be an excellent time to make contributions to your portfolio.
For example, if you had bought a simple S&P 500 index fund when it first fell by 20% in the 2022 bear market, you would be sitting on a 39% gain today, even after the recent market crash.
Making Contributions: A Smart Move
A bear market can be a great time to boost your contributions to retirement accounts and college savings accounts. As a personal example, I have an auto-drafted contribution going into both of my kids’ 529 savings plans once a month, but I recently decided to make an extra contribution to take advantage of the decline.
- Riding out the ups and downs is a time-tested long-term strategy.
- Simply staying the course with your investments, no matter what the market is doing, is a crucial aspect of successful investing.
On the other hand, one big mistake to avoid is panic selling. It’s natural to want to sell “before things get any worse,” but this instinct can often lead to poor decision-making. The central goal of investing is to buy low and sell high, but our natural instincts tell us to do the opposite.
If there’s one move to keep in your bear market playbook, it’s to hold on to good companies in your portfolio for as long as they remain good companies. In other words, unless something significant has happened to the business itself, selling into a down market is usually a bad idea.
As the old adage goes, “The trend is your friend.” In a bear market, it’s essential to remember that the companies in your portfolio are still operating and generating revenue, even if the stock price has fallen.