What to Do With Money When the Stock Market Drops Sharply (Hint: Don’t Panic)
Welcome to Black Monday. The Dow is down more than 5% this morning and the S&P is down 3.4%, the worst drop we’ve seen in a while. Naturally, everyone is in a panic. This is understandable, but don’t do anything drastic yet.
We’ve all heard the cliché “buy low, sell high,” and it’s one of those things that sounds perfectly logical on paper. So when the stock market plummets, we log into our Mint accounts, see our own investments crash like a drunk driver, and let fear take the wheel . In short: we panic and then make bad decisions.
Here’s what you need to know about all the recent stock market crises, including what you should do about it.
Why is this happening?
China’s stock market is officially crashing, which scares investors around the world. Their own index fell 8.5 percent Monday morning, the lowest drop they’ve seen since 2007. This is due to several reasons, but primarily depends on the fact that China is dealing with a debt crisis . Banks offered companies a huge amount of loans during the recession, and this led to a large amount of debt, which led to the contraction of the economy.
There are also concerns here in the United States. Uncertainty remains as to whether the Federal Reserve will raise interest rates . Oil prices are dropping, which is great when you are at a gas station, but it can be a concern for the economy as a whole.
But the bottom line is that China has the second largest economy in the world, and their problems are causing a “worldwide sell-off.” Translation: everyone in the world goes crazy, sells their shares and falls into the market. Oddly enough, panic only exacerbates the situation.
What Happens When You Panic and Sell
It’s hard to look at your retirement account and see that it’s a thousand dollars or more empty. At times like this, it’s tempting to sell all your stocks, mutual funds and index funds, get your butt off the market, and shove your net worth under the proverbial mattress. And when a lot of people do this, the market keeps dropping.
However, these things do happen. This is 101 investments : the market goes up, then it goes down. But over time, by and large, it always increased again, improving by 6-7% on average in the long run. While people will tell you that this is a sign that the market is going to crash, we told you earlier that no one knows for sure when the market will go down and, in any case, the market is always cyclical.
Days like today are spoken by professionals like Warren Buffett when they say:
Games are won by players who are focused on the playing field, not those whose eyes are fixed on the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, try weekdays.
Again, this advice sounds perfectly reasonable, but when a recession does hit, it’s easy to lose sight of the long term and go crazy when you see your own net worth fall.
If that’s not enough to convince you not to panic, consider this:
- You haven’t actually lost your money. Your portfolio has just dropped in value. You lose your money when you sell. By selling now, you lose the chance to get your funds back (which is likely to happen).
- Selling your shares may mean that you also have to pay taxes on them. If you have money in a taxable investment account and have made any profit on it (even if it is much less now), you will have to pay taxes on that tax return later .
- If you withdraw money from your retirement account before the actual retirement, perhaps , you will have to pay a fine .
So now we are on the same wavelength. Step one: don’t panic.
What should you do instead
We’ve already told you that buy and hold investing is the best way. That is, you must invest for a long time and not succumb to daily or even monthly fluctuations. Many people compare investing to gambling, and when you are actively trading stocks day in and day out, of course, it sounds like gambling as heck. But if you invest correctly for the long term, all you have to do right now is nothing. Take your time to sell all of your shares. You probably don’t want to pay much attention to them right now.
We’ve told you where to store your savings, depending on your purpose . But if you are investing for the long term, the best thing you can do right now is wait out the decline and keep your assets. And you probably don’t want to keep track of how your bills are dropping because that only fuels panic.
If anything, some aspiring investors are even using stock market downturns to buy cheap !
However, it serves as a good reminder to keep your portfolio balanced . Leah Snell, CFP® and partner at the consulting firm Snowden Lane Partners , offers:
Once you have a financial plan and appropriate asset allocation, stick to it. If you don’t, consider doing some research and developing an allocation that is comfortable and appropriate for your risk tolerance in both upward and downward markets, so that the next time the market increases in volatility, you will be better prepared financially and emotionally. Because market volatility will repeat itself.
If you need your investment money in the next 3-5 years, most of it shouldn’t be tied to the stock market anyway . Now is not the time to sell and balance, but this must be kept in mind for future savings.
Will it get worse?
Of course, the economic issues that we have mentioned are troubling. Experts are concerned about China’s economy. We’re still not sure about this whole issue of Federal Reserve interest rates. And oil prices can be worrisome too.
But these things happen, and it’s a natural part of the process. In fact, it might not be so bad. As Neil Irwin, senior economic correspondent for The New York Times, explains :
It’s time.
This is not to minimize the losses that investors have suffered, or to say that each of these moves can be fully justified by the data, and certainly not to predict what will happen next week or next month. But if you back down a bit, what happened in the financial markets this week looks less like a disaster than an impending disaster, but more like a much-needed respite as the various markets started looking a little lively.
The best thing you can do right now is wait and make sure your portfolio is properly balanced. So which will get worse? The short answer is: maybe, but then it will probably get better. It has always been that way.