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4 Things To Do When The Stock Market Drops

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Today the stock market took another hit. The Dow Jones Industrial Average fell over 799 points or about 3.1%. The S&P 500 lost over 3.2%. An inverted yield curve, often a precursor to a recession, continued concerns about a trade war with China and concerns about Apple’s future outlook all fueled investor concerns. On top of this the stock market is closed tomorrow due to a national day of mourning for former President Bush, making many investors fearful of being long on stocks going into this midweek closure. What should you do now? Here are 4 things to consider when the stock market drops.

4 Things to do When the Stock Market Drops

Breathe 

Cable news networks like CNBC have a field day during steep, sudden stock market corrections like we saw today. It’s easy to get caught up in all of this hype. Don’t let yourself be sucked in.

Step back, take a deep breath and relax.

Take stock of where you are 

Review your accounts and assess the extent of the damage that has been done. Depending upon how you are invested it may be minor or a bit more significant. Investors who are well-diversified have probably been hurt but not to the extent of those with a heavy allocation to equities and other volatile areas that have been hit.

Review your asset allocation 

Has your portfolio weathered this storm and the declines we saw earlier in the year as you would have expected? If so your allocation is likely appropriate. If not, then perhaps it is time to review your asset allocation and make some adjustments. Proper diversification is great way to reduce investment risk. This is a good time to rebalance your portfolio back to your target asset allocation if needed as well.

Go shopping 

Market declines can create buying opportunities. If you have some individual stocks, ETFs or mutual funds on your “wish list” this is the time to start looking at them with an eye towards buying at some point. It is unrealistic to assume you will be able to buy at the very bottom so don’t worry about that.

Before making any investment be sure that it fits your strategy and your financial plan. Also make sure the investment is still a solid long-term holding and that it is not cheap for reasons other than general market conditions.

The Bottom Line 

Steep and sudden stock market declines can be unnerving. Don’t panic and don’t let yourself get caught up in all of the media hype. Stick to your plan, review your holdings and make some adjustments if needed. Nobody knows where the markets are headed but those who make investment decisions driven by fear usually regret it.

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Comments

  1. Roger,
    Thanks for all your great advice in the past. It is appreciated! My wife and I are both 65 and retired. I have been thinking about selling all my mutual funds in a Roth IRA at one firm and moving it all to a Vanguard Roth IRA account for several reasons: much lower expense ratios, more index fund choices, and to have all my retirement investments in one place (80% of which have already been at Vanguard for a couple years now). I was ready to move forward with this, but as you noted, the market really took a dive this week. Should I be worried about timing or just move forward and sell low, buy low?

    • Roger Wohlner says:

      Mike thanks for the comment and glad that you have found some of what I’ve written to be helpful. I understand your apprehension, especially in a market environment like this one, but over the long haul I doubt there will be much impact. One option, and it may be better or not, is to transfer your holdings from the other custodian in-kind and then sell as appropriate once they reach Vanguard. I would call them to discuss this option including pros and cons if interested.

  2. Good, sensible advice. Not only that – concise and straightforward. Harder to write like that than many realize. Nice work!

  3. Great advice. I try to focus on the fact stocks are “on sale” and it’s a great time to buy. As long as your asset allocation is appropriate for your risk tolerance, take advantage of the discount and periodically rebalance.

    It worked well for us during the “lost decade” of the 2000’s.

    John

  4. Well said,
    don’t panic, review position, don’t look too much in your loses,
    wait till market bounce and: BUY, BUY, BUY

    • Roger Wohlner says:

      Endre thanks for the comment. Market declines are not a new thing, we’ve seen them in the past and we will see them in the future. Panic leads to poor decision making.

  5. Very sage advice. I’ve chosen to take your tip #4 to heart and go on a nice buying spree. I suspect we will see lower prices for the next year or two, but I’m in it for the long term.

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