What not to do when the stock market tanks (+video)
Financial woes in China sparked a global selloff Monday morning, with the Dow plunging over 1,000 points before rebounding in the afternoon. It can be difficult to watch thousands of portfolio dollars disappear before your eyes, but here's how you should respond to a market plunge, according to experts.
For Wall Street investors, Monday morning marked the dreariest stock market opening they had seen in several years. Continuing last week's swoon, the Dow plunged over 1,000 points in early trading before recovering later in the day; as of 2 p.m. it was off by nearly 300 points. The S&P 500 has fallen about 2.36 percent on the day, and Monday morning it dipped into "correction" territory for the first time since 2011. Since last week, the global market has lost trillions from the sudden decline, and oil, coal, and copper levels have dipped to levels not seen since the 2009 financial crisis.
The downturn has been blamed on myriad possible culprits, including fear of a weakening Chinese economy and the looming interest rate hike by the Federal Reserve. Many point to the natural pattern of a bull market, which before last week had gone without a major correction for nearly seven years. Whatever the cause, the US stock market is continuing to feel the impact. However, that doesn’t mean it’s time to panic. Here are a few things experts agree should NOT be done in the face of a down market.
1. Do NOT panic
As the economy fluctuates, many feel the flight or fight response kick in. Action becomes instinctive as people stop thinking and start acting. However, acting is likely the worst thing to do. As Jack Bogle, founder of mutual fund company Mulvern, told CNBC, the best thing to do is “nothing.”
The reasoning behind this is simple: Market corrections are normal. Market corrections, drops of at least 10% from a recent high, happen often and rarely last long. Neil Irwin points out in his article for The New York Times that “this week looks less like a catastrophe in the making and more like a much-needed breather when various markets had been starting to look a little bubbly.” Market corrections typically only impact short-term traders, which is another reason why investing experts advise against making long-term investment decisions based on short-term gains and losses.
2. Do NOT act like a speculator
As Bogle also said to CNBC, “I have advice for long-term investors, not for speculators.” Investments require long-term thinking and long-term commitment. This fact doesn’t change in the face of an economic hiccup.
While a speculator or short-term trader might be suffering from the recent economic downturn, that is a result from trying to turn a profit from short-term trading. This kind of trading can be lucrative, but also makes speculators vulnerable to a number of risks that long-term investors are not. Looking at a a five-year chart of the Dow, even with the current swoon, the market is still hovering around the levels seen in 2014, when it had already gained back its losses from the Great Recession.
3. Do NOT forget there is time to recover
Historically, the trend of the stock market is upward progression. Although a long-term perspective on investing does help mitigate many of the risks involved, losses can still be incurred. However, the market recovers, and so do portfolios. There is always time to recover as long as investments stay in place to await the upswing. As the chief executive at Ladenberg Thalmann Asset Management, Philip Blancato, told Reuters, "the conjecture that the Chinese economy can propel the U.S. economy into recession is ridiculous when it's twice the size of the Chinese economy and is consumer based."
4. Do NOT forget to trust your past decisions
Investors should also trust themselves. Rob Eril says in his New York Times article, “At some time in the past, when you were not scared, you made a decision to construct your portfolio a certain way.” Although the recent downturn is a scary time, investing in the stock market likely wasn’t an overnight decision. There was planning, preparation, and financial consultation that led to the current portfolio. These are all reasons that while investors look wearily at the current stock market, they should trust their past actions to carry them through.