What To Do (and not) When the Stock Market Dips
The major stock market indices are in negative territory year to date. With talks of a possible recession, inflation, and the war between Russia and Ukraine, there is a lot of uncertainty. Tune in to learn the dos and don’ts when the stock market is down so that you protect your investments and don’t make a fear-based decision.
Should I be Investing in the Stock Market?
Investing can be a great way to make your money work for you. However, some people are scared of investing because of its unpredictable ups and downs. I recommend that the money that’s invested should always be looked at through the lens of long-term potential. In other words, your short-term cash, like emergency savings or cash for large purchases in the near future, shouldn’t be invested. The stock market is for those who are in it for the long haul and are willing to take risks to benefit from long-term growth.
When the Stock Market is Down
Don’t panic. It’s easy to get nervous and make decisions out of fear, but this won’t help. Second, ensure you have a diversified portfolio. Having your money in different equities and sectors of the economy, like real estate, ensures your investments don’t move up and down together. This is a good indicator of a diversified portfolio, thus helping you reduce risk.
The big question many are asking now is “Are we headed towards a recession?” If so, should I pull my investments? Here’s how long the stock market took to recover during the Great Depression and some recent recessions:
- The Great Depression (1929 – 1933): The stock market took over two decades to recover after stocks fell more than 80% below peak prices.
- Great Recession (2007 – 2009): The stock market took one year and six months to recover after the S&P 500 lost nearly half its value.
- Recession of 2020: The stock market took six months to recover after it fell over 30%.
In short, the market has historically recovered even after drastic drops. Legendary investors, like Warren Buffet, always say “you can’t time the market,” meaning one can’t possibly know when stock prices will go up or down. Selling your investments when the market is down and choosing to reinvest after a “rebound” can mean you’ll generate a loss or not have as high a return as having stayed in the market.
What the Research Shows
JP Morgan Chase studied the S&P 500 by hypothetically investing $10,000 between January 1, 2002, and December 31, 2021. Here’s what they found:
- The investment grew to just over $61,000 when it was left alone (9.52% average return)
- Missing the 10 best days of the market meant the investment grew to $28,260. (5.33% average return)
- Missing the 20 best days of the market meant the investment grew to $16,804. (2.63% average return)
- Missing the best 30 days meant the investment grew to $10,904. (0.43% average return)
- Missing the best 40+ days generated a loss. (-1.51% average return)
Although past performance is not indicative of future returns, trying to time the market could mean you miss the best days in the market, which can make a significant difference to your overall returns.
As of now, investing has become easier than ever. An investment strategy you can take advantage of is called dollar-cost averaging. As the investor, you can divide up your total planned investment across a certain period to reduce the impact of the volatility in the stock market. Currently the market is down, and you may want to consider buying “stocks on sale” to take advantage of the lower stock prices.
I recommend working with a financial planner that can help you understand your risk tolerance, how to diversify your portfolio, and help you avoid making bad decisions during market downturns.
In this episode, Luis talks about the following and more:
- Panic selling
- Knowing your risk tolerance
- The importance of diversifying your investments
- Historical recessions and stock market crashes and how long they lasted