Who else is recovering from the craziness that was the market yesterday? As soon as the market opened investors abandoned ship faster than a member of One Direction, which sent the Dow Jones Industrial Average (DJIA) down a staggering 1,100 points. That was the biggest decline on record in a trading day. You might be wondering – what should you do with the market now!?
The short answer? Absolutely nothing.
Yes, things are bad right now. Last week was the worst for the market in four years. Technically, the Dow saw a market correction – which means a 10 percent decline from the all-time high it reached in May.
For the most part, the US stock market is being driven down by fears over the Chinese economy. The Shanghai stock market is down over 40% from its high earlier this year. Basically, it turns out that prices might have been inflated, in part due to some help from the Chinese government. It didn’t help that China devalued its currency, the yuan, on Aug. 11.
I can’t tell you exactly what to do now, but I can tell you what you probably shouldn’t do. Don’t sell!
There are a few reasons you should hold steady:
- The US Economy
For the most part, the US economy has been doing ok. Recently we’ve seen steady growth, pretty good earnings reports, stable banks and an unemployment rate of 5.3%. The last time we saw a market correction was in April 2011, when unemployment was 9.1%. It’s a totally different economic environment.
- Time Heals all Wounds
In most situations, your best bet is to sit and wait for your stocks to rebound. It’s why I switched to long term investing – you’re almost always better off over the long term. For perspective, let’s take a look at the performance of the S&P 500 over the past 10 years.
You can see that even if you had invested at the top of the market the 2008 crash, if you stuck with your shares, you would have been at break even in 2013 and be making a good profit today. you’d actually be up over 58% total if you’d held the S&P 500 over the past 10 years.
Do you remember the panic over the market drop last Fall? It’s ok if you don’t, because the market rebounded pretty quickly after that (note: I shared the exact same advice back then).
Things even rebounded a little bit yesterday. The market had erased half of its losses by the time it closed.
The easiest thing to do in a down market is panic and start selling off all your shares. It’s part of the reason things dropped so quickly yesterday. But before you sell, consider whether you’re selling to be smart or out of fear.
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).
In the meantime, you can take one of two other approaches. Either, decide you’re sitting tight while the market stabilizes and don’t make any stock sales or purchases. If that’s the route you take, consider minimizing your exposure to market news for now. It’ll just make you upset for no reason.
Or, you could consider buying some stocks while prices are down. 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. I have my eyes on Disney (DIS) and Canadian Solar (CSIQ). I’d also think about buying Netflix (NFLX) if I didn’t already own a lot of shares.
Whatever you do, don’t panic! Instead, enjoy the last few weeks of Summer – aka, some outdoors Rosé. Cheers!