The Stock Market Just Dropped Nearly 8%. Here's What You Need to Do Now
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After weeks of stock market volatility, fears the coronavirus could stifle the global economy seemed to accelerate into full-blown panic Monday, with the Dow down nearly 8%. Trading volume spiked. Newspapers were running banner headlines.
As an investor, you need to be prepared to do what's difficult and counter-intuitive: Nothing.
Investors have been worried about the new coronavirus, which has been disrupting global supply chains and travel plans for weeks. Last week, the stock market was already down about 12% from its all-time high in February. Then on Sunday night, a dispute between Saudi Arabia and other major energy producers sent crude oil prices plunging. Stocks soon followed suit. The Dow closed down 2,014 points, or 7.79%, at 23,851. Japanese stocks were down 5%, and those Germany and the U.K. were both down nearly 8%.
For many older investors, the market plunge brought back the gut-wrenching uncertainty they might not have felt since the 2008 financial crisis and its aftermath. For many younger investors, it's the worst bout of market turbulence they've experienced during their investing careers.
While it might not be easy to just sit and watch as your hard-earned savings shrink, that's exactly what you should do. If Monday's uncertainty has you tempted to sell, here are three things to keep in mind:
Stocks Aren't Down As Much As You Think
The suddenness of the stock market's reaction to the coronavirus has been pretty jarring. Less than a month ago, the Dow was at a record high. But as news emerged that the virus forced a massive quarantine, and then had spread outside of China, the market's reaction was swift, with the stock market recording its fastest correction — defined as a 10% drop from the peak — on record. On Monday, stocks fell so fast, plunging 7% in a matter of minutes, that the NYSE halted trading so traders could get their bearings.
But as an investor you should be thinking about the long term. And if you take a step back, the moves of the past few weeks don't look quite so dramatic. When trading finished Monday, the Dow was at 23,851, about 19% below its recent high. That's still about 700 points, or 3%, above where it was at the start of 2019, which was one of the market's best years on record, with the Dow up more than 22%. Go back the start of 2017, and the Dow hadn't even celebrated crossing 20,000 yet.
The fact of the matter is, stocks have been rising steadily for almost a decade now. And in fact, plenty of experts have been saying the market was overvalued — way overvalued by certain metrics like price-to-sales, where stocks had recently reached an all-time high.
So while the suddenness of the stock market's decline naturally feels unnerving, you should remember the market always moves quickly and try to think of it in broader terms. For example, instead of thinking of the plunge as investors abandoning the stock market, think of it as investors re-calibrating their expectations for corporate profits back to where they were at the start of last year.
You Can Weather the Next Bear Market
Of course, it's possible things could get even worse, with stocks entering bear market territory — defined as 20% drop from the previous high — for the first time more than a decade. For younger investors that could mean a prolonged time looking at grim 401(k) balances, or better yet not checking at all. For older investors who are retired, it's a bigger deal, since you may have to find ways to pay your bills without tapping your stock portfolio.
But even the prospect of a bear market doesn't mean you should abandon your investment plan. If you're older than 30, you probably have unpleasant memories of the 2007-2008 bear market. But keep in mind that was one of the worst periods for the stock market on record. Historically, even most big market sell-offs, aren't that bad.
Ned Davis research counts 25 separate bear markets going back to the 1929 crash. While the 2007-2008 bear market saw stocks lose half their value and lasted 408 days, that was far more severe than usual. The average bear market saw a decline of 36% and last 299 days — well less than a year.
And remember that's just for stocks. If you have a balanced portfolio of both stocks and bonds — you losses will be far less severe. The iShares Core Growth Allocation ETF (AOR), on Money's list of 50 recommended ETFs, has a traditional mix of roughly 60% stocks and 40% bonds. It's down about 9% for the year, including Monday's big decline.
You Are More Likely to Hurt Than Help
Even if your instincts are still telling you to get out of the market, remember: History shows your moves are more likely to hurt than to help.
Mutual fund researcher Morningstar Inc. has long looked at money flowing into and out of mutual funds to track how fund investors actually fare, compared to funds themselves. One recent report found that, for the past 10 years through 2018, U.S. stock funds returned 6.8% on average, while investors reaped actual gains amounted to only 6.3%, largely because of investors' propensity to trade at inopportune times. (Morningstar's study also suggested that investors in all-in-one funds with a mix of stocks and bonds, many of whom likely buy shares automatically through their 401(k)s, didn't face this problem.)
What gives? Remember the market can shoot up just as easily as it can crash. As former Money editor-in-chief Diane Harris notes, an investor who missed just the 10 best day for stocks over the past two decades would end up cutting their long-term returns in half. Many of those big up days came shortly after big down days — another key reason to just sit and wait it out.
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