When big drops in the stock market start to make major news headlines, investors tend to get nervous. The steady gains of the past few years have lulled many people into a feeling that the market can only keep going up. That sudden barrage of media notifications that the market is “crashing” makes it seem like panic is the only option. But if we step back from the 24-hour news cycle, we come up with a different approach.
What is a stock market correction?
First, let’s look broadly at stock market corrections. These occur when there’s a sudden, significant sell-off of shares, which can be triggered by any number of factors. It could be related to a global event that appears to have far-reaching effects for business, a corporate scandal, or any number of other factors. Sometimes no one can definitively explain these corrections, even in hindsight. Whatever the reason, the Dow starts to look like lemmings dropping off a cliff, and investors panic. Frequently, the day after a sell-off, the market continues to decline as panicked investors attempt to cut their losses.
Here’s the upside of a correction. Share prices drop, which suddenly makes other investors think it’s a good time to buy. Maybe there’s a stock they’ve been watching that is now available at a bargain price. Or perhaps the event that precipitated the sell-off leads investors to believe a certain industry or sector of the economy stands to grow. Inevitably, the market begins to recover. The media headlines are rarely as loud during a recovery as they are when there’s a drop. The point is that the market does recover over time. If you can control your panic and stay the course, it’s highly likely that you’ll eventually sell your shares at a profit.
Five rules for investors
Remember, investing in the stock market allows you to grow your savings in a way that outpaces inflation. Sure, occasionally, an investor gets lucky, makes the right moves, and nets a huge profit. But most investors who see success with stocks are in it for the long haul. If you’re about to spend the money you have invested—say to put a down payment on your first home or send your kid to college this fall—the stock market isn’t the best place for your savings. Make your selling choices based on events in your life and consult a financial advisor for assistance.
Our general advice for investors comes down to five rules:
- Come up with a long-term plan and stick with it.
- Diversify your portfolio and watch what the companies you’re investing in do over time.
- Monitor your asset allocation based on a global perspective of investment options.
- Monitor the news, but don’t make rash decisions based on a day’s headlines.
- Don’t buy or sell on emotion.
Above all, assess your comfort level with risk before you invest. Working with a financial advisor doesn’t eliminate risk, but many people find it helpful to have a sounding board who understands the big picture. If you’re looking for guidance on investing, saving, and financial planning, please contact us to schedule an introductory conversation.