If you haven't already heard, on February 5th, the stock market experienced the largest drop it has in years, with the Dow plunging almost 1,600 points. The drop amounted to 4.6 percent, which is the biggest decline since the European debt crisis in 2011.
For investors, such stock market drops are scary.
They are also predictable.
While nobody can predict when the market will tank (or by how much), we all know that markets ebb and flow. Sometimes, they do so dramatically (especially when unexpected events occur).
But a stock market crash like we witnessed this week is only bad news if you need your money soon. This is why you shouldn't buy stocks with money you'll need in the next couple of years.
For all other investors, a stock market crash should be a non-issue.
In the past few years, however, the value of the S&P 500 has more than doubled.
That's the good news, and also the bad.
The fact that the S&P 500 has done so well over the last several years (despite the occasional scary bump) is a reminder that stocks are still a great long-term investment. But stocks won't climb at this rate forever.
How much a long-term stock market investor can expect to earn over 30 to 40 years is the subject of much debate.
Historically, an average annual rate of return of 10 percent (not adjusted for inflation) over 30 years is not unusual. But we shouldn't expect that will always be the case. This article does a good job explaining why.
What should you do after a stock market crash?
Nothing
For long-term investors, the best thing to do when the stock market crashes is nothing.
Take a breath, turn off the news and -- whatever you do -- don't log in to view your account balances.
Resist any urge to sell stocks
Selling stocks in panic is the worst thing you could do after a stock market crash. Successful investing is about buying low and selling high. When you sell after a crash, you do just the opposite.
And if you think you can just cash out for now and then get back in when the market improves, consider this: You have no way of knowing when the market will swing back. And there is a big cost to missing just a few really good days in the stock market.
For example, if you invested $10,000 in the S&P 500 between 1993 and 2013 and left your money invested, you would end up with $58,333 a 9.2 percent annual compounded return. If you missed the 10 best days, you would end with just $29,111, a 5.49 percent return. If you missed the 20 best days, you'd have just $11,984 (a 0.91 percent return). These statics are from a 2014 Guide To Retirement by JP Morgan Asset Management.
Buy stocks (if you were going to anyway)
The best time to buy investments is when you have money to invest. The best time to sell investments is when you need money for something else.
That said, if you've wanted to invest but have been dragging your feet for whatever reason, you might see the stock market crash as a buying opportunity. No, you don't know if the market is going to go back up or continue to go down. But you do know this: Stocks are about 10 percent cheaper than they were last week.
Rebalance your portfolio after things have calmed down
Diversification is important for successful investing. Although I'm a fairly aggressive investor, bonds and real estate securities make up about 20 percent of my portfolio.
After a volatile period in the market, the value of your investments may change enough to shift your actual asset allocation away from your target. There's no rush, but big movements in the stock market are a good reminder to give your portfolio a checkup and consider making some moves to bring your portfolio back into balance.
Robo-advisors can help manage your money when the stock market is in flux
For unseasoned investors, this drop can be especially terrifying. But, it's also not the end of the world. When you're young, you have years to make up for stock market drops - so millennials, as a group should be the least concerned.
That being said, it's still easy to react poorly when something this scary happens. That's where robo-advisors come in.
Robo-advisors don't react out of fear like we do. Through complex algorithms, they choose the best stocks and bonds for you, which can be especially helpful (and offer a lot of peace of mind) when the market is in flux and you're panicking.
Comments
Post a Comment