Survive a market drop – and make it work for you
Losing money never feels good, but keep your cool and you can boost long-term returns.
Last Tuesday The Dow Jones Industrial Average had its biggest one day point drop in around six years on surging volume at the New York Stock Exchange. In this single trading session, all of the market’s gains year-to-date were taken back and actually turned negative. Don’t panic! It takes nerves of steel to shake off a stock drop like the one that came Tuesday – even conservative index-fund investors are more than 3 percent poorer. But the world’s best investors not only shake them off – they thrive on them.
They know sell-offs are common, perfectly normal, and even healthy. When stocks go way up in a hurry, their prices become unrealistically high. Only by falling occasionally (and even sharply) in the short run can stocks continue to rise in the long run – without the agony of today’s drop, the ecstasy of tomorrow’s good returns becomes impossible. If ever there’s been a good time to panic, that had to be it. But as the old saying goes, things are darkest before the dawn. If you’d sold out of stocks at the end of a depression, you would have missed the returns that followed.
Even after the Dow’s wrenching plunge in Oct. 1987, remember that the index actually ended up rising 2 percent in value that year. And it took only 15 months (until January 1989) for the Dow to make its way back above.
“The market does not give ‘all clear’ signals, but there are always people out there who worry about the market and they are willing to sell. That’s a good thing. I say we should be buying from these people right now.”
In fact, there’s such a thing as paying too much attention to your money. It has been found that people who pay close attention to news updates actually earn lower returns than people who seldom follow the news.
When you think about this a little more, it actually makes good sense. News coverage tends to make market movements seem even bigger than they are – and to make them seem likely to persist just when they are most likely to reverse. Take action
Fortunately, there are several simple and effective steps you can take to turn a stock market crash to your advantage. Since a down market can be a great time to buy solid investments at bargain prices, because you’ll be picking up more shares for the money, which will pay off when the market rebounds.
This will not only help cushion any fall in stock prices, but it will amplify your gains once the market recovers. A market sell-off is a good time for a gut check. Obviously you would have wished you’d known before this decline. But at least you’ll know which stocks or funds you want to ride into the next one. It’s also a good time to make sure you have the right mix of stocks and bonds, which can add ballast to a portfolio during downdrafts.