Investing in the stock market takes discipline. Just when you think everything seems to be going smoothly and your portfolio is steadily increasing, market volatility appears – often out of nowhere – and calls your entire investment strategy into question.
But the only lesson smart investors have learned – usually at their expense, through past experience – is that if you want to be successful in the face of market volatility, you have to fight your emotions. While your gut reaction to a downturn like the one we saw on Wednesday might be to sell everything and protect the rest of your assets, it’s not the right move. Instead, we have to put the market downturn in perspective and find ways to profit from it.
Hype vs reality
If you’ve read financial news since the market closed on Wednesday, you may already know these scary facts:
- The drop of 832 points in Dow Jones Industrial (DJINDICES: ^ DJI) was among the worst in the history of the market benchmark. Only twice – both times in February – has the Dow Jones posted larger declines in terms of points lost in a single day.
- Wider market measures also saw almost unprecedented drops in points. For the S&P 500 (SNPINDEX: ^ GSPC), the drop of 95 points is the fourth worst on record, while the Nasdaq Composite (NASDAQINDEX: ^ IXIC) has only had a few sessions with losses worse than his downward movement of 316 points.
- Most stocks have seen steep declines from their recent highs. About two-thirds of S&P 500 stocks are down 10% or more from their best levels, and nearly three in 10 are down 20%, what some experts call “bear market territory.” .
It’s easy for news sources to fuel investor panic with facts like these. But the reality isn’t that dire, as long as you can get over the immediate pain of a daily drop like Wednesday’s and stay focused on your long-term strategic plan for building wealth. Here are a few things to keep in mind.
1. Wednesday’s market decline was not a “crash”
The most important thing to keep in mind about Wednesday’s downward movement is that point-based declines can be extremely misleading. With markets having climbed so far over the past decade, moves that were previously exceptional are no longer as significant.
For example, in 1987 the Dow Jones’ 508 point drop on what came to be known as Black Monday seemed truly cataclysmic as it represented an almost 23% drop in a single day. But even though Wednesday’s drop was much larger in points terms, the fact that the Dow is now above 25,000 means it’s translating into a drop of around 3% – a move that was much more common. . Focus on percentages rather than points and you will be able to assess market movements in a much more rational way.
2. Wednesday’s drop did not significantly affect stock market gains
Given the way many have spoken of the decline, many people would have thought their wallets had been squashed. Yet even after a drop of 832 points, the Dow Jones was still up 880 points for the year, and the S&P and the Nasdaq have also remained up since the start of 2018.
The same goes for key stocks which suffered even bigger hits than the overall market on Wednesday. As the 1500th episode of The Motley Fool from its Market Foolery podcast was discussed after the fall, the e-commerce giant Amazon.com (NASDAQ: AMZN) finished nearly 15% below its best ever levels in early September, while pioneering video streaming Netflix (NASDAQ: NFLX) has experienced a decline of about 20% from its peak. Yet for long-term investors, Amazon is still up 50% in 2018 alone, and Netflix has produced an almost 70% return for shareholders so far this year. If you had decided that you would never invest in these two stocks because you were worried about taking big dips, you would have effectively avoided those dips, but you would never have gotten those huge returns either.
3. Over time, you will forget about the market downturns
It’s hard to believe that when the market seems to be in a free fall, you won’t always remember the pain of the downside. But the market has always rebounded from adversity, and savvy investors take this past experience and use it to take action that seems bold.
You don’t even have to go back that far to see a good example of this. In February, the Dow suffered not one but of them drops of more than 1,000 points in short succession. These declines were part of a larger market correction that ultimately took the market down by around 12% in less than a month. Yet in less than eight months, the Dow recouped those losses and hit new all-time highs. Looking back, what appeared to be gargantuan dips marked only a brief pause in the bull market. As former Motley Fool commentator Morgan Housel put it succinctly:
Today was the worst drop since the February drop that you can’t remember.
– Morgan Housel (@morganhousel) October 10, 2018
4. Channel your inner greed
One of Warren Buffett’s most famous quotes advises investors to “be fearful when others are greedy, and greedy when others are afraid.” Big dips in the market are the best time to follow the advice of the Oracle of Omaha by taking a closer look at stocks that have suddenly become much cheaper to buy.
Market Foolery commentators Chris Hill, Jason Moser and Matt Argersinger spoke about the importance of having a stock watch list for situations like this. It is difficult to be unmoved when evaluating stocks after a significant fall in the market, because short-term fears about a company’s immediate future are hard to ignore. But if you’ve ever researched a business and put it on your watchlist, then it’s much easier to make the rational decision to add stocks when a market opportunity presents itself.
Stay calm and prosperous
It’s always tempting after a big drop in the stock market to take your profits and run. The smartest and most proven decision, however, is to stick with your long-term investment plan – and for the best investors, that often means looking for exciting opportunities to to buy promising stocks at lower prices.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.