Stock Market Crash – Do not Panic!

market crash do not panicOh, my goodness! The market is crashing. Sell everything you have and get out now!

Or not.

During a tumultuous stretch from Tuesday, August 18 to Tuesday, August 25th, the S&P 500 fell by -11.17% highlighted by two days of massive losses on Friday the 21st and Monday the 24th. On those two days alone, the market “crashed” by -3.19% and -3.94%, respectively. The nosedive was fueled primarily by concerns about the world economy with worries about China’s economic health being the main culprit. As of the writing of this article, further declines are quite possible.

That’s scary. No one likes to see their investments lose value. Even worse is when the market plummets in such a rapid fashion. If you had a 401k or IRA balance of $100,000 invested in an S&P 500 index fund on August 17th, then one week later you would have “lost” $11,169 leaving merely $88,831 remaining in your account. Similarly, if you had $500,000 invested you would be down to $444,153. Watching $55,847 vanish right before your eyes in a matter of days can be traumatizing and make you want to react right away to stem further losses.

market crash exampleI am here to tell you – do not panic! Do not let your emotions get the best of you.

Market Crash: Who Should be Worried

There are a handful of folks for whom panic might be appropriate. For example, if you were saving for a down payment on the purchase of a home and you were heavily invested in stocks then you could be in a world of hurt especially if you were close to finalizing the purchase. Essentially, those with short term horizons who need to sell their positions and use the money now are likely screwed. Hopefully you are not among this category. Anyone who has need for immediate use of their money should be in a much safer financial instrument such as a high yield savings account, money market account, or a conservative bond fund.

Market Crash: Who Should NOT be Worried

So who should not be worried about the recent market selloff? The simple answer is: nearly everyone else.

  • A History Lesson – We have been through this before and it was way worse last time. In the market crash of 2008, the S&P 500 dropped -45% from its 2007 high. If you stayed the course and did not panic sell in 2008 then you have more than made up for anything you originally lost. Take a look at the graph below. Notice all of the ups and downs? We are on one of those downward blips right now. Across time the whole trend is up. If you have an intermediate to long term horizon, do not sweat this current dip or any other future ones. It is merely a market correction.

S&P 500 chart

  • Locking in Your Loss – If you panic and sell your investments now you lock in your loss or lock in a reduced gain if you were already up. Selling now makes everything final. Otherwise, the heavy losses remain unrealized. That is, they are on “paper” and do not become realized until you sell. I keep harping on a longer term investment horizon, but if you fall into that category then ride it out. Do not lock in your losses now in an attempt to avoid more losses. Keep it unrealized for now and catch the next wave back up.
  • Diversify – The proper amount of diversification will vary from person to person based on age, investment goal, and risk appetite. The intent of diversification is to not “put all your eggs in one basket.” By spreading the wealth and investing in a range of stocks, bonds, and mutual funds then you shelter yourself if one of them takes a nosedive. Proper diversification helps to shield some of the blow in market freefalls such as the one we have been experiencing. If you are not diversified then you will be hit harder than others who have diversified their investments. The basic goal to achieve when diversifying is to invest in several different asset classes that carry with them different amounts of risk. If you have a long term investing horizon such as for your retirement savings, then you can afford to lean toward a more risky mix. If you have a shorter term timeline, then put more of your money into less risky investments.

For instance, the S&P 500 lost -1.35% on August 25th. As you can see below, my own personal return was -1.00%. Now, I will admit, I am not as diversified as I could be. In particular, I do not own much of a bond position at his time because my investment horizon is rather long and I am being aggressive. However, I am diversified in funds across different company sizes and asset classes  (Large Cap, Medium Cap, Speciality, etc.) and investing strategy (Value vs Growth).

Personal Capital You Index

The You Index is a nifty part of Personal Capital which is an awesome site that allows you to track your net worth (among a whole host of other features and services).

  • Great Time to Buy – I have said it before on Personal Finance Utopia and I am certain you have heard it before elsewhere: buy low, sell high. Guess what is all-of-a-sudden low? If you have some available funds then now might be a really great time to get in to the market instead of out. There will definitely be some bargains available. Even if there is still some more market correction to come, you stand a good chance to eventually turn a profit by scooping up some devalued stocks that need a good new home to take care of them 😉 !

How do you react to a market “crash” like what has been happening recently? Do you easily get into panic mode or is it no problem for you to weather the storm? Have you been tempted to sell your stocks or funds? What is your near term investment strategy?

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Image courtesy of Bridget Coila at flicker.
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