Learn What to Do About a Market Drop
August 24, 2015
Friday was a wake-up call for investors who thought the markets only went up. It capped a week of pain and suffering across the major market indexes. In fact, this was the worst week for U.S. stocks in 4 years according to the August 22, 2015 Wall Street Journal headline article by E.S. Browning, “Stock Plunge Picks Up Speed”.
With worries about China’s economy, Europe or specifically Greece still mired in debt, and lagging oil prices the markets are reacting. Investors are also on edge about a pending Fed rate hike.
Here’s where we are across the major stock market indexes:
- At Friday’s close the DJIA fell 10.1% from its record May high.
- The S&P 500 and Nasdaq had their worst single day drops since 2011.
On Friday, there was a -3.52% plunge in the Nasdaq Composite index and a milder drop of -1.34% in the Russell 2000, a better representation of the total market.
But if you step back for a moment, you’ll notice that over the past 52 weeks, the Nasdaq is still up 3.7% and the S&P 500 isn’t even down a full percent. Now, that’s not too awful for a long term investor is it?
To ease the pain a bit more, step back to 2012. During the last 3 years the annualized stock returns for all 4 indexes is quite healthy with a bountiful 15.3% annualized gain for the Nasdaq with the DOW sporting the lowest, although still respectable 7.6% annualized return.
So is there anything to worry about?
Let dig into this subject a bit further.
Why is the Market Down?
Are you panicking now?
Are you afraid you’re going to lose all of your investment money?
Before you take any action, understand a bit about the investing and the economy.
Investment markets are cyclical. They go up and down, just like business cycles. You can’t predict when they will reverse direction. And that is why you keep a diversified portfolio. Also, you may not be able to pinpoint exactly what causes a market to fall.
Take a look at this chart for the S&P 500 from 1990 to 2015 (August 21,2015)
data source; Yahoo!Finance, August 22, 2015
What do you notice about the chart?
In the short run, markets go up and down. Over the long term, the price trend of equity markets is up.
If you’re an investor, then you need to remain cool-headed.
I recently published an article about doing a premortem, to help with the investment scenario we are currently experiencing.
Use the Premortem and Prevent a Big Investing Mistake>>>>
In fact, in my recent premortem, I got two of the causes of the current market plunge correct. Read the article above to find out which ones. And, I was so excited about this technique that I wrote another article about the topic for U.S. News and World Report.
So why is the market down? There are many reasons. Maybe it was getting a bit frothy and needed to return to a more fair valuation. Or perhaps, the recent drop in oil, problems in Greece, and slowing of China’s economy may be causing investors to sell, driving down stock prices. All we know for certain is that markets don’t go only one direction, they go up and down in value.
So what is the investor to do about a market drop? Here are some strategies to stay the course during market volatility.
What to Do About a Market Drop?
Don’t Panic
Are you a long-term investor? Let’s assume that you won’t need your investment dollars for 5+ years. Why would you even think about selling now and locking in your losses?
Don’t overreact. Market corrections occur periodically. If history is any guide, after awhile the stock markets will go back up. If you sell now, you’ll likely miss the rebound.
Turn off the News
CNBC is an entertaining network. With Jim Cramer, Michele Caruso-Cabrera, Sue Herera, Steve Liesman, and many more, there’s a bounty of news, opinion, and information. But acting on what you hear in the media or from your brother-in-law is not the way to grow your wealth. If you traded on every bit of news you read and heard, you’d be buying and selling all day long. It’s proven that excessive trading is not the way to build long-term wealth.
Be an Educated Investor
Learn something about market history and behavior. Be aware that no one knows what will happen in the future and when stocks will go up or down. Take a few hours to read about smart portfolio management. You will likely learn that reacting instead of being proactive is a recipe for failure.
Interested in building long term wealth? Then click here and learn the smartest way to invest.
That means, set up your investing goals in advance, whether they be passively managed index fund investments or sticking with a few active funds or stocks as well. Consider your investing plan in advance and don’t deviate just because the market is going down. Investors who are driven by their emotions tend to sell at the bottoms and buy near the tops. If you’re devastated by market declines, then consider having a healthy dose of cash and bond investments in your portfolio.
How to Benefit from Cyclical Investment Markets-MBA Lecture Recap>>>>
The Takeaway
Market declines are also a wonderful opportunity to pick up some bargains. As stock prices and valuations fall, use some cash to add to your stock allocation. Whatever you do, keep a cool head.
