On March 23rd, the Dow Jones was down over 26% for the month. That put the Dow on pace for its worst month since 1931. Yes, you read that right — 1931 — eight years before WWII began.
Understandably, many investors are frightened. And, at times, you may feel like throwing in the towel and just converting all your investments into cash.
But panic selling is the worst thing that you could do during a stock market recession. By selling in the downturn, you’d only be locking in your losses.
Times of stock market volatility can be scary. But here are four better ways to react than giving in to your panic-selling urges.
1. Keep a long-term perspective
How soon will you need to use the money you’ve invested in the stock market? If the answer is over five years, history indicates you have very little to worry about. And if the answer is 10, 20 years, or more, the truth is that your investments will probably endure a few more bear markets before you start making withdrawals.
Yes, it’s true that past performance is no guarantee of future results. But we can get an idea of what’s most likely to happen with the stock market by evaluating its history.
And the fact of the matter is that stock market recessions are nearly always followed by strong and prolonged rebounds. For example, the last major market downturn took place in 2008, when the S&P 500 declined by - 37.22%.
But after 2008, the S&P 500 went on an incredible 9-year tear, as seen below:
- 2009: + 27.11%
- 2010: + 14.87%
- 2011: + 2.07%
- 2012: + 15.88%
- 2013: + 32.43%
- 2014: + 13.81%
- 2015: + 1.31%
- 2016: + 11.93%
- 2017: +21.94%
And the market’s response to the 2008 crash is not an anomaly.
As this chart from First Trust Advisors illustrates, bear markets have consistently been shorter and less impactful than bull markets. While the average bear market lasts 1.3 years and suffers an average loss of 38%, the average bull market lasts 6.6 years with an average cumulative return of 339%.
Steep declines within the span of a few weeks or months can seem like the end of the world. But when you view them through the lens of the market’s long-term history, it can help to reduce anxiety and muster up the gumption to stick things out.
2. Invest cash that’s sitting on the sidelines
Most experts say that it’s a good idea to have 3 to 6 months of expenses saved in your emergency fund (precisely for events like this). But if you’re sitting on more cash than that, now would be a great time to invest that money in the stock market.
Virtually every stock is on sale compared to its price point just a few weeks ago. No one can guarantee when the stock market will hit bottom. But as long as you have a long investing timeline, were definitely in a buyers market.
If you have extra cash to invest, begin by maxing out any available retirement accounts. And, remember, that you have until this year’s tax filing deadline (July 15, 2020) to make IRA contributions for last year.
3. Create an automated investing schedule
Once you’ve invested any excess cash that may be sitting in bank accounts, it’s time to evaluate how you invest your monthly contributions.
As mentioned in the last point, there’s no way to know exactly when the market will bottom out and begin its rebound. But by investing the same amount of money in a certain investment on a consistent basis (such as monthly or weekly), you can reduce the effect of the ups and downs.
For example, imagine that you decide to buy $500 of XYZ each month. When you begin, XYZ costs $50 per share, so your $500 buys you 10 shares. But if XYZs share price grew to $100 per share, your $500 would only buy you 5 shares. And if XYZ decreased in value to $25 per share, you’d get 20 shares for your $500.
This strategy is often referred to as dollar-cost averaging. And the reason that dollar-cost averaging appeals to investors is that it limits the impact of market volatility.
4. Stay away from “get rich quick” investments
Right now, we’re dealing with huge daily market swings that have often been greater than 5%. And many individual stocks are swinging back and forth by 10% or more per day.
When the stock market is moving with such volatility, it can be tempting to abandon your investing principles. If a stock drops 20%, you may feel completely convinced that it will soon rebound.
But, in reality, there are no guarantees with individual stocks–especially in the short term. A stock that drops 20% today, could drop another 15% tomorrow and another 10% the day after that. And then it could declare bankruptcy the day after that.
Remember, the entire market is on sale right now. So there’s never been a better time to avoid trying to pick the winners and losers and stick with passive investments like index funds and ETFs.
Related: When passive investors should become stock pickers
The Bottom Line
Most importantly, if you want to avoid panic selling, you must resist the impulse to base your investment decisions on the news. In fact, the best thing that you could probably do to avoid bad investing decisions is stop checking the stock market altogether.
Yes, the market is going crazy right now. But don’t allow yourself to go crazy along with it. Stay calm. Ride this bear market out and stick with the investing plan that you set before all this craziness began.
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