Wise Moves in Uncertain Times: 3 Don’ts for Handling a Stock Market Collapse

Imagine a normal day at the office when suddenly, an alert appears on your smartphone indicating a significant plunge in the stock market. What do you do? Like several others, you might react impulsively and in a way that may not be the best or most advised course of action.

You should not take three key steps during a nosedive in the stock market. Familiarizing yourself with these can help you avert potentially costly blunders in the future.

1. Don’t panic

Firstly, resist yielding to the anxiety that many headlines seem to incite in you. Remember that the goal of those who create headlines is to draw the most readers to their articles, leading to more exaggerated headlines such as “Dow Plummets 600 points!” rather than more moderate ones like “Stock Market Declines 1.7% Today.” It’s crucial to understand that each of these headlines reflects the same rate of decrease; given the Dow’s recent proximity to 34,000, a fall of 600 points equates to a 1.7% decline. Stay focused on the percentages, not the points.

Concentrating on your enduring performance instead of a fleeting perspective can keep you from reacting impulsively. There may be moments when you suffer a temporary decline in the stock, but the company’s future value is paramount for long-term investors. Typically, a decrease in the stock market doesn’t equate to a diminished growth potential of a company; hence, it’s usually better to hold on. Offloading a stock when it’s low is an assured way to incur a loss or negligible profits.

Rather than obsessing over the rise and fall of stock prices, focus on their overall worth. Say, for example, you bought shares at $60 per share, and now they’ve fallen to $50, don’t get hung up on the near 17% drop. Instead, evaluate the true value of the company and its stock. If the business is successful, maintains manageable debt levels, has ample cash reserves, and grows by launching new products, employing more individuals, and constructing more factories or shops, it indicates potential. As a result, its stock price may very well rise in the future.

2. Don’t exit the stock market

Staying calm can help you avoid significant errors, such as selling your stocks out of stress due to a falling stock market. It’s important to remember that the stock market goes through periodic dips, sometimes severe or long-lasting. However, no matter how big or small past corrections and crashes have been, the market has always managed to recover and reach new peaks.

For instance, the Schwab Center for Financial Research’s data shows the stock market experiences a “correction,” or a decrease of 10% to 20%, roughly every alternate year. This pattern was noticeable over two decades, from 2001 through 2021. Even though the stock market faces these temporary drops, it generally bounces back quickly. It was observed that the stock market has grown in the majority of these years — with just three outliers — achieving an average gain of about 7%. Furthermore, another reputed market analysis firm, Yardeni Research, has analyzed data from 1950 onwards, concluding that such market disruptions occur every 1.9 years. Among these, 32 corrections lasted less than a year, while 24 were less than four months.

It’s prudent to refrain from impulsive selling when the stock market is experiencing a slump, but it is even more astute to use such situations to buy stocks if possible. This is because a significant dip in the stock market can allow you to purchase shares in prosperous, thriving companies at a reduced price. To be ready for this opportunity, keeping a list of stocks you’re interested in buying at the right price is a good strategy. Plus, keeping some money on hand for these occasions is worthwhile. However, it’s crucial not to keep too much of your portfolio in liquid cash as it may result in you losing potential profits while waiting for the perfect moment.

3. Never lose sight of your goal

In summary, never lose sight of your main objective – your investments’ substantial and continuous growth. This necessitates a consistent and structured investment of your money in simple but effective index funds and/or individual stocks. Putting your money in affordable, highly efficient index funds may be all you need to realize long-term development.

Undoubtedly, this procedure will necessitate a substantial duration, optimally spanning twenty years or more. The stock market will unavoidably experience dramatic peaks and troughs during this lengthy period. Despite this, there’s a considerable chance of reaping substantial gains. It’s vital, however, to remain calm during each market downturn and stick to your plan.

Investing additional money in your portfolio can be particularly beneficial when the market is low, so don’t stop investing. Try not to monitor your portfolio on a daily or hourly basis obsessively. Trust in the process, and if you’re feeling unsure, learn more about investment strategies to strengthen your faith in your approach.

Financial downturns, such as stock market crashes and recessions, could improve your long-term financial health if you think logically.

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