What not to do when the stock market tanks

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. 

Richard Drew/AP
Traders work in a booth on the floor of the New York Stock Exchange

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. 

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.