5 Reasons to Keep Calm When the Stock Market Takes a Dive
In August, investors saw some of the U.S. stock market’s worst days in years. Even investors and media pundits who are known for their longview approach to investing began to make irrational choices with their investments.
Stocks rise and stocks fall. It is a longstanding truth of investment. History shows that even when stocks fall significantly, they will rise again, often stronger than before. Looking toward the future, however, can be difficult when you are watching the value of your holdings plummet. Here are five reasons to keep calm and keep investing even when the market takes a nosedive:
Stocks Will Rise Again
History shows that when the market drops, it tends to come back stronger sometime in the following years. A study by NYU’s Stern School of Business showed that following nearly every down period in the S&P 500 is a period with better than average returns. Take for example, the 30% rise in the S&P in 1991 that followed a 3% decline in 1990, or the 37% rise in 1975 that followed a 24% drop in 1974. While some recoveries take longer than others, such as the case in 2008 and 2009, records show that disciplined investments will steadily grow to have higher values than before.
Lower Prices Can Work to Your Advantage
As with any investment, there is a time when you need to sell and a time when you should buy. But selling when markets are down might mean losing out on future gains or simply losing money by selling for less than you bought for. However, for longterm investors a downward market gives you the chance to buy stocks at bargain prices with enormous upside potential.
Declines are Healthy for the Longterm
A major downturn in the market may reflect problems with national or international economies, but financial disasters like those of 2008 are very unpredictable and may happen only about once in a generation while dips of less than 10% generally indicate healthy market valuations, which is important to prevent a larger, more painful crash down the road. Often a market decline simply indicates investor fears that certain stocks were overvalued as expectations exceeded earnings.
The key to good investing is planning for the longterm. Even the best economists cannot predict what the market will look like day to day, but sound strategy will help prepare you for the ups and downs. Young investors have several years before retirement to recover financial losses and to gain higher returns on investments and can be a little riskier in their portfolios. Those nearing retirement, however, should err on the side of caution by employing a more conservative investment strategy, which includes the use of short term bonds.
Tax Planning Opportunities
When stock markets experience a large decline, it may give you tax planning opportunity. This includes loss harvesting or being able to sell unwanted assets that previously had high unrealized gains.
When panic sets in, keep the big picture in mind. From offsetting capital gains to offering the perfect opportunity to buy, there are a number of benefits to a market decline should you choose to see the bright side. So long as your portfolio is sound and tailored to your individual circumstances, you will weather the storm and come out of it stronger than before.