Up until two weeks ago the market was all sunshine and butterflies. The S&P 500 was breaking records and Alibaba (BABA) had the biggest IPO ever. Then, all of a sudden, the market mood turned to fire and brimstone. Last week the S&P index had its biggest weekly drop since May 2012 and the Dow Jones Industrial Average erased its gains for the year.
Analysts are running over each other to explain the drop. It’s Ebola, it’s the European economy, it’s Germany, it’s Ukraine, it’s the terrorists, it’s a bubble bursting, it’s the Martha Stewart and Gwyneth Paltrow feud! The real answer is there is no one answer for what is going on. Most likely it is a combination of all of the above (ok, minus the conscious coupling dig).
Honestly, the reasoning doesn’t even matter that much. What does matter is how you react to the situation in the market right now. There are two keys to remember when dealing with a drop like this:
- Do not panic!
The media might be over-hyping things a bit. For entertaining examples, check out the post Josh Brown, of The Reformed Broker, wrote yesterday on the dangers of “Correction Twitter.”
The S&P 500 lost 3.1% last week, and 5% from the record high it experienced on September 5th. While this is bad, it is not the imminent crash some articles are implying. The term “market correction” is being used over and over, and yet a market correction technically only applies when the market is down 10%.
For perspective, let’s take a look at the performance of the S&P 500 over the past 10 years.
First, you can see the big difference between last week’s drop and the pre-recession drop. This is nowhere near a crash situation.
Second, you can see that even if you had invested at the top of the market before 2008, if you stuck with your shares, you would have been at break even in 2013 and be making a good profit today (5 years later). And with earnings reports and the Christmas shopping season coming up there is a good chance for today’s market to stabilize relatively soon.
This brings me to my second point:
- Don’t make impulsive moves
The easiest thing to do in a downward market is panic and start selling off all your shares. I’m begging you not to do this.
I know from experience that this can be easier said than done. Over the past few years some of my biggest trading regrets have been selling out of losing positions that would have been extremely profitable had I just held and waited a couple years (see: Facebook (FB), Apple (AAPL)). It’s a reason I am trying to become less of a trader and more of an investor (despite the site title).
Hopefully you have not made these mistakes yet and can just learn from mine. Stocks almost always pan out in the long run. And luckily, one of the biggest assets of young investors is time.
While I urge you not to sell, I also think you should stay away from buying right now. I don’t think we have reached the bottom in the market drop yet, and I honestly have no idea how much farther the market is dropping. I would not try and buy a stock now just because it is “cheap,” since the stocks you think are cheap now may be expensive in a month.
That said, if there is a stock you are truly interested in from a value perspective, you may consider buying it now. You may not get a chance to get in at the bottom, but if you are looking to hold a stock for at least a year, purchasing it at the bottom doesn’t really matter. Just make sure you will have no regrets even if the stock goes down in the next few months. Two stocks I’m considering for this move are Apple and Gilead Sciences (GILD), but I’m going to hold off on buying anything for at least a week.
The easiest way to think about how to treat this bear market is to think about how you would treat a real bear attack. Don’t panic and don’t make any sudden moves.