Don’t Panic! Any fan of the Hitchhiker’s Guide to the Galaxy knows that those calming words are scrolled across the face of the Hitchhiker’s guide to bring comfort to the user. They should really be scrolled across the top of your screen when looking at your brokerage account statements this week, because panicking is the worst thing you can do when the market goes into a tail spin.
Panicking makes you sell stocks at the bottom, or try to do fancy things like selling stocks short or buying options in an effort to protect your portfolio that often just end up making you lose more money. It’s really our nature to try to do something, but just like it is usually the best thing to let go of the wheel and take your foot off of the gas and brake when your car goes into a spin on a patch of ice, sometimes the best thing to do when investing and the market goes into a free fall is to just let things go and wait for things to settle.
Things to know about market drops:
The losses from many sell-offs will be largely or fully regained within a year.
If you look back at some of the big sell-offs, such as the 2008 fall and the 1987 drop, you’ll see that the prices of stocks had largely recovered by about a year later. If you can simply stay put and wait, things usually get better.
The crowd is almost always wrong, so when people are selling, it might be a time to buy.
If you can add money during a fall, you can come away in better shape than you started. You’ll probably miss the timing, so expect the market to continue to drop as you buy for a while. This is called “trying to catch a falling knife,” which is just as tricky as it sounds, so don’t expect to catch the bottom. Just buy in, raise some more cash, and then buy more. Also, spread your investments around a bit since some segments of the markets will recover before others.
Even when you see sell-offs coming, figuring out exactly when they will occur is nearly impossible.
It is easy to see when the market is overvalued and ready for a fall, but that doesn’t mean it won’t continue to rise for a couple of years after that. Accept the fact that you can’t time the market. Buy regularly when you have many years before you need the money. Sell and raise the cash you’ll need within a few years regardless of market conditions.
Some sell-offs are very short and then resume the climb.
Before a real sell-off to end a bull market, there may be false starts. Sometimes stocks will fall, only to rebound when the news comes out indicating that the Fed isn’t going to raise rates or something. If you panic and sell, you may end up buying back in at higher prices, only to see the market actually fall at that point.
Once a sell-off is complete, it will probably be the best buying opportunity you will have for years.
At the start of 2009, there were many great companies that had their share prices in the single digits that are above $50 now. Market sell-offs are great things when you still have many years to invest. Take advantage of big bull markets when you’re starting to get to the time in life when you’ll need the money to raise the cash you need. Take advantage of market drops to accumulate shares when you won’t need the money for several years.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.