Buzz
Welcome to Black Monday, everyone. The Dow dropped more than 5% this morning, and the S&P saw a decline of 3.4%, marking the worst dip we’ve had in a while. Naturally, people are in a panic. It’s understandable, but don't take any drastic actions just yet.
We've all heard the saying, “buy low, sell high,” and while it sounds straightforward, it’s easier said than done. When the market crashes, we log into our investment accounts, watch our portfolios dive like a car out of control, and then allow fear to take over. In other words, we panic and make poor choices.
Here’s what you need to know about the latest stock market crisis and what steps you should consider taking.
Why is this happening?
China's stock market is officially in freefall, sending shockwaves through investors worldwide. This Monday morning, their market index dropped by 8.5%, the steepest decline they've seen since 2007. A number of factors are at play here, but the primary issue is that China is facing a major debt crisis. Banks issued massive loans to companies during the recession, leading to overwhelming debt and a shrinking economy.
Concerns are mounting here in the U.S. as well. There’s the ongoing uncertainty about whether the Federal Reserve will raise interest rates. On top of that, oil prices are falling, which is a relief when you’re at the gas station, but could spell trouble for the economy overall.
But the main point is that China has the second-largest economy in the world, and their struggles are sparking a global “sell-off.” In other words, everyone around the globe is panicking, unloading their stocks, and pushing the market even further down. Ironically, this panic is only deepening the crisis.
What Happens When You Panic and Sell
It’s tough watching your retirement account take a hit, losing a thousand dollars or more. During times like these, it’s easy to feel the urge to sell everything—stocks, mutual funds, index funds—and pull out of the market entirely, hiding your wealth like it’s cash under your mattress. The problem is, when many people do this, it causes the market to dive even further.
These things are part of the process. It’s basic investing: the market rises, then it falls. But when you step back and look at the big picture, it has always rebounded, historically averaging a 6-7% return over time. While some may argue this signals an impending crash, as we’ve mentioned before, no one can predict exactly when the market will take a dive. Besides, the market is always in a cycle.
Days like today are exactly what seasoned investors like Warren Buffett mean when they say:
Games are won by players who focus on the game itself, not by those constantly watching the scoreboard. If you can enjoy your weekends without checking stock prices, why not try the same during the week?
This advice sounds logical, but when the market dips, it’s easy to lose track of the long-term view and panic when you see your portfolio losing value.
If you need more reasons not to panic, here’s another one to think about:
You haven’t truly lost any money. Your portfolio’s value has simply dropped. You only lose money when you sell. By selling now, you’re missing the opportunity for your investments to recover (which they very likely will).
Selling your stocks might also trigger taxes. If you’re using a taxable investment account and have made any gains (even if those gains are now much lower), you’ll have to pay taxes on that return later.
If you take money out of your retirement account before reaching retirement age, you could face a penalty.
Now that we’re on the same page, step one: stay calm.
What to Do Instead
As we’ve mentioned before, buy-and-hold investing is the way forward. That means you invest for the long haul and don’t let short-term ups and downs—whether daily or monthly—throw you off. Many people compare investing to gambling, and when you’re day-trading, it definitely feels more like gambling. But if your strategy is long-term, the best thing you can do right now is: nothing. Don’t rush to sell everything. Right now, it’s better not to pay too much attention to your portfolio.
We’ve previously discussed where to allocate your savings based on your goals. If you’re investing long-term, the smartest move right now is to ride out this dip and hold onto your assets. And try to avoid obsessively checking your account balances—because that only feeds the panic.
In fact, some enterprising investors even take advantage of stock market dips to buy low!
However, this is a great reminder to maintain a balanced portfolio. Leah Snell, CFP® and Partner at wealth advisory firm Snowden Lane Partners, advises:
If you have a financial plan in place with the right asset allocation, stick with it. If not, it might be a good idea to do some research and create an allocation strategy that suits both your comfort level and your risk tolerance, whether the market is up or down. That way, when market volatility strikes again, you’ll be better prepared both financially and emotionally. Because volatility is inevitable.
If you plan on needing your investment money in the next 3-5 years, most of it shouldn’t be invested in the stock market at all. Now is not the time to sell or rebalance, but it’s something to keep in mind for your future savings.
Will it get worse?
Yes, the economic challenges we’ve mentioned are worrisome. Experts are definitely concerned about China’s economy. The uncertainty surrounding the Federal Reserve’s interest rate decisions remains, and oil prices could be a troubling factor as well.
But these things are part of the cycle, and it’s a natural part of the process. In fact, it might even turn out to be a positive development. As Neil Irwin, senior economics correspondent for The New York Times puts it:
It’s about time.
That’s not to downplay the real losses investors have faced or to say every move made is entirely supported by data. And it’s certainly not an attempt to predict what will happen next week or next month. However, if you take a step back, this week’s financial market events look less like an impending disaster and more like a necessary pause, given that various markets had started to show signs of overinflation.
The best course of action right now is to wait it out and ensure your portfolio is well-balanced. So, will things get worse? The short answer is: probably, but it will likely improve after that. It always does.
Artwork by Sam Wooley.
