3 Reasons You Should Remain Calm Despite Stocks' Terrible Month
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September was a bad month for the stock market.
The S&P 500, Nasdaq and Dow indexes — three indexes that are used as benchmarks to measure the overall stock market — all had their worst month of the year in September. The S&P 500 and Nasdaq experienced their largest monthly drops since March 2020 when COVID-19 hit the U.S. and stocks crashed. The S&P 500 fell 4.8% in September, the Nasdaq fell 5.3%, and the Dow was down 4.3%.
Stocks were volatile over the last month as investors contended with inflation fears, a rise in bond yields (which can hurt riskier assets like stocks), concerns over the government's debt ceiling, the high debt levels of one of China's largest real estate developers and mixed economic reports. Investing experts have also been saying a market correction is likely to happen before the end of the year, so a decline wasn't entirely unexpected.
September is also historically a tough month for the stock market. But even so, seeing a dip in your portfolio can be scary. Here's what you need to remember.
1. Stocks are near where they were in July
Investors have been seeing record highs in 2021, and one bad month for stocks does not wipe out all of the wins.
Your stock portfolio is likely near where it was in July. The S&P 500, for example, closed on the last day of September at around 4,308 points, and the last day of June it was at nearly 4,298 points.
The Dow was already reversing course Friday morning, gaining 100 points.
2. The economy still has room to grow
While the economy's recovery has slowed since its strong start of the year, there is room to grow.
Economists surveyed by the National Association for Business Economists say they have tempered their expectations but still anticipate the U.S. gross domestic product (GDP) to grow 5.6% in 2021. Two-thirds of the survey respondents say they believe jobs levels will return to pre-COVID-19 levels by the end of 2022.
The economy is not the stock market but, but economic recovery tends to go hand-in-hand with rising stock prices and increased investor confidence.
3. Holding steady will help your investments in the long term
Don't panic. When you see your portfolio go into the red, it's easy to consider yanking your money out of the market and holding cash on the sidelines as a safety measure. But doing so could hurt your long-term goals.
When the pandemic hit and the stock market crashed in 2020, investors pulled $326 billion out of mutual funds and exchange-traded funds in March alone, according to Morningstar. That was more than triple the fund outflows seen in October 2008, the previous record. Panicked investors fled to safety, dropping $685 billion into money market funds, which are considered a low-risk way to invest in high-quality, short-term debt instruments and cash (that have relatively low interest rates and pay very little).
But if those investors had held on and kept their money in the stock market, they would have doubled their money by August of 2021.
So keep in mind that pulling money out when the market drops can cause a major blow to your portfolio. Missing the market's best 10 days over the last two decades would have cut your overall return in more than half, according to J.P. Morgan Asset Management’s 2021 guide to retirement. While the return on a $10,000 investment would have been $42,231 for an investor fully invested, it drops to $19,347 for an investor who missed those key 10 days.
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