Think of what happens on the stock market as a kind of fire drill. As we all know from childhood, one of the most important rules is not to panic. And in this case, panicking would mean selling stocks when the market falls.
They do exercises to stay fit, but we don't have much experience with the S&P 500 stock index falling more than 3 percent in a single day. According to Howard Silverblatt of S&P Dow Jones Indices, the last time this happened was September 13, 2022.
Given that we've been in office for nearly two years, we can forgive our negligence. Many people got nervous and rushed out to check their investments or trade on Monday morning, and many of them had trouble logging into the websites and apps of brokerage firms, including those of Charles Schwab, Fidelity and Vanguard.
But why should you really sell at such a moment? This is not a rhetorical question, so let's try to answer it.
Selling is smart when you know the stock market is going to fall sharply and stay down for a long time. However, most people don't know, and those who were right in 2022 or 2020 or 2008 or 2000 or 1987 may not know the difference between the skill they think they have and the luck that probably helped them then.
Many of the people who traded like mad on Monday are professional investors of various kinds — or the robots they've programmed to automatically sell when this or that indicator flashes yellow or red. But here's a dirty little secret about hedge funds, for example: All their trading activity in response to world events doesn't produce better results for most of them than if they put their money in an index fund that tracks the stock market. Mutual fund managers don't fare much better.
If you need the money you've invested soon — for a down payment or college tuition, for example — it's probably a scary moment, and selling might make sense. But if you're scared, think about the feeling. In the future, you might not want to invest money you need quickly in the stock market at all.
Much of your money invested in stocks is probably earmarked for retirement savings, and chances are you won't need it for many years or even decades.
While it would be a good trick to convert all your money into cash when prices fall and then buy stocks again when the stock market bottoms out, the bottom is often when investors are most afraid. Most people can't predict the bottom of the stock market at all, let alone have the courage to bet all their money on that prediction.
However, rational thinking is often lacking in these moments, and fear is nothing to be ashamed of. Here are a few things that might help you feel a little better.
First, let's look at the early days of the pandemic, when stock prices fell by more than a quarter in about a month. Who would have thought that within a year, the market gains after the bottom would offset those losses and more? But that's exactly what happened.
Now let's consider other future facts that are still elusive: we don't know who the next president of the United States will be or what kind of hurricane season it will be. If possible, try to enjoy the wonders of an unpredictable world and consider the possibility that there may be good news and the markets will react accordingly, even if we can't predict most of it.
Second, look at the performance of your investment portfolio over the past year or so. Chances are, you made a lot of money by investing regularly and then leaving things as they are. Well done! Try to think of those huge gains rather than smaller accounting losses from today's decline.
Now consider what would have happened if you had sold all your stocks in 2020, when the pandemic was at its worst. The S&P 500 has more than doubled since then.
Finally, and as always, you are not the stock market. If you have, say, a third of your savings invested in cash, bonds or real estate, your total book losses in your investment portfolio will be less than the losses in the stock market on Monday. After all, the cash didn't melt away.
Moreover, you are the sum of many large parts, including the equity in your property and your future salary, not to mention the immeasurable returns you get from spending time with friends and family, playing outdoors, and enjoying art.
Fly a kite or stroll between beautiful buildings and visit the market again tomorrow.