Here’s the best thing you can do if you’re worried that today’s tanking stock market is killing your returns: Nothing.
That can be tough advice for investors to follow on a day when the Dow Jones Industrial Average fell more than 1,000 points at the opening bell (although it’s pared its losses some since then), as investors worry about the slowdown in China’s economy. Still, panicked, knee-jerk selling is one of the biggest mistakes that retail investors can make.
Today’s morning selloff may have been bigger than any one-day point loss for the Dow, but it’s still doesn’t approach the magnitude of stock market crashes. And market “corrections,” or drops of 10 percent or more like the one we’re now seeing, are typical even during long-term bull markets. Since 1946, the S&P 500 has experienced a correction, on average, every 18 months, but it had been more than 47 months since stocks pulled back by more than 10 percent.
If you’ve been lulled into thinking that stocks will always go up and the ride will be relatively smooth, consider this a useful reminder.
“Volatility is a way of life when you’re investing in stocks,” says Wasif Latif, head of global multi-assets at USAA investments. “Just because it hasn’t been there the last two or three years doesn’t mean it’s gone away. Now we’re remembering what it feels like to be invested in stocks.”
It’s also worth putting today’s selloff in context. The market is still only at a 10-month low, meaning investments are still worth more than they were as recently as a year ago — and you’re likely way ahead if you’ve been in the market for longer than that. Including its recent losses, the S&P 500 is still up more than 75 percent over the last five years, and it’s nearly tripled from its lows in early 2009.
Even if this market turn is the start of something bigger than just a correction, one of the biggest risks of dumping your investments now is not knowing when to get back in. “Markets often bounce back as quickly as they drop,” says Greg McBride, chief financial analyst at Bankrate.com. “You’ve got to be in it to win it, and there’s no guarantee that you’re going to get back in before the market zooms higher.”
That’s a lesson that many retail investors learned the hard way when they pulled money out of stocks back in 2009.
“In times like this, it’s important to remember your investments are designed to carry you through decades, not days,” Lane Jones, chief investment officer with Evensky &Katz wrote in a note to clients today. “It’s important to stay focused on the long-term.”
Once the markets calm down, you may want to revisit your asset allocation strategy to make sure that it fits your time horizon and risk tolerance. Then, no matter how gut wrenching it may be in the short term, keep calm.