Picture a typical day at work, and a notification on your phone indicates a drastic drop in the stock market. What’s your next move? Chances are, like many others, you might react in a way that’s not wise or recommended.
Here are three crucial actions you should avoid during a stock market downfall. Familiarize yourself with these to prevent making possibly expensive mistakes in the future.
1. Don’t panic
Firstly, avoid giving into the fear that numerous headlines seemingly wish to ignite in you. Always remember, the objective of headline creators is to attract maximum readership to their articles, leading to more sensational headlines like “Dow Falls 600 points!” as opposed to more tempered ones like “Stock Market Drops 1.7% Today.” It’s notable to remember that both these headlines mirror the same drop rate; considering the Dow’s recent nearness to 34,000, a 600-point fall corresponds to a 1.7% drop. Concentrate on the percentages, not the points.
Focusing on your long-term performance rather than a short-term view can prevent you from panicking. While you may find yourself temporarily experiencing a loss in stock, the company’s value in the coming years is most important for long-term investors. Usually, a drop in the stock market does not imply a reduction in a company’s growth potential, so it is often preferable to hold on. Selling when a stock is down is a guaranteed method of recording a loss, or minimal profit.
Instead of fixating on the fluctuations in stock prices, concentrate on their value. For instance, if you purchased shares at $60 each and they’ve decreased to $50, don’t dwell on the nearly 17% reduction. Rather, consider the actual worth of the company and its shares. If the business is thriving, has sustainable debt levels, and sufficient cash reserves, and is expanding by introducing new products, hiring more employees, and building additional factories or stores, it shows promise. Consequently, its share price is likely to increase in the future.
2. Don’t exit the stock market
Maintaining calm can assist you in preventing a major mistake: selling shares simply due to stress over a declining stock market. It’s beneficial to remember that the stock market experiences occasional falls, sometimes significantly or for an extended duration. However, despite past minor or substantial corrections and crashes, it has always bounced back and achieved new heights.
For example, data from the Schwab Center for Financial Research reveals that roughly every other year, the stock market undergoes a “correction,” a decrease ranging from 10% to 20%. This trend has been observed over the 20 years, from 2001 to 2021. Despite these periodic declines, the stock market usually recovers quite swiftly. It has been noted that the stock market has seen an increase in most of these years, with just three exceptions, and the average profit is roughly 7%. Another established market analysis firm, Yardeni Research, reviewed data from 1950 and found that such market corrections happen approximately every 1.9 years. Of these, 32 lasted less than a year, and 24 were under four months long.
It’s wise not to make rash sales during a stock market downturn, but it’s even wiser to take advantage of such conditions and purchase stocks if possible. This is because a significant drop in the stock market may offer an opportunity to acquire stocks of numerous successful, flourishing businesses at discounted prices. To prepare for this, keeping a record of stocks you would be interested in buying at the right cost is a good idea. Additionally, having some funds readily available for such opportunities is beneficial. However, it’s important not to hold too much of your portfolio in cash to avoid missing out on potential profit increases while you wait for the right time.
3. Never lose sight of your goal
In conclusion, stay focused on the ultimate goal – your portfolio’s impressive and sustained expansion. This will require regular, disciplined cash investments into straightforward yet impactful index funds and/or single stocks. Investing in low-cost, high-performance index funds could be all that’s necessary to achieve long-term growth.
This process will require a significant amount of time, ideally spanning over two or more decades. During such an extended time frame, there will inevitably be moments of extreme highs and lows in the stock market. However, in the end, there’s a high probability of achieving impressive profits. It’s crucial to maintain your composure during each market slump and stay committed to your strategy.
Adding more funds to your portfolio is particularly advantageous when the market is down, so don’t halt your investment. Avoid constantly checking your portfolio every day or every hour. Have faith in the process, and if you lack confidence, educate yourself on investment strategies to build belief in your approach.
Market downturns like stock market crashes and recessions can potentially benefit your long-term financial situation if you handle them with a rational mindset.
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