Thanks to global economic concern of the price of oil, the Dow Jones and S&P 500 have dropped by about 3.5% over the past week or so. While sudden, multi-day declines like this can be scary, they are a natural part of investing.
When this happens, the absolute worst thing you can do is panic and sell.
What investors tend to do
It is common knowledge that the overall goal of investing is to buy low and sell high, right? However, many investors do the exact opposite.
While stocks are going up and up, and people are watching the value of other people's stocks shoot through the roof, they get greedy and buy at the worst possible time -- when everything is expensive. When the market starts to fall, investors tend to panic and sell their stocks when they're cheap.
This is one of the main reasons why the average investor underperforms the market. In fact, according to a study by Richard Bernstein Advisors, the average investor has only averaged an annual total return of less than 3% over the past 20 years, while the S&P has averaged 9.6% during that time.
What they should be doing right now
Instead of panicking, now is an excellent time to do some bargain hunting. We all know that some stocks (like oil companies) have dropped for a reason, but a lot of stocks have fallen simply because the rest of the market has.
This is especially important for investors who have a long time until retirement and can ride out the ups and downs. Investors who are in it for the long haul should love when the market corrects, as it lets them buy more of their favorite stocks at a discount.
So take some time and see what stocks you own, or would like to own, that have gotten a little cheaper over the past couple of weeks. There are even some good bargains to be had in the oil and energy sectors, as many other investors have panicked and sold their shares.
For example, ExxonMobil and Chevron have fallen about 16% and 24% from their highs, respectively. Even though the oil plunge might cause some pain in the short-term, these companies will continue to thrive for decades. Shares are "on sale," so instead of panicking and selling, now may be a great time to get in on these long-term winners.
Hang in there, it'll pay off in the end
Sure, it's scary to buy when everything seems to be dropping. In all honesty, it's entirely possible that the market will continue to drop for a little while longer. However, for investors who are in it for the long haul, that shouldn't be a concern at all.
For example, consider what could be called the two worst times to buy in recent history. The first is the day before "black Monday" in 1987 and the second is the 2007 peak before the market collapsed during the financial crisis.
An investor who had invested $10,000 in S&P index funds the day before black Monday would have seen their investment grow to about $135,000, a 1,250% gain and an average total return of more than 10% per year.
And in a more recent context, consider that an investment at the 2007 peak would be up more than 50% today. So, even if you had bought in at the worst time before the financial crisis, you would have made money.
The point is that you shouldn't let short-term (or even extended) drops in the market cloud your judgment and cause you to panic and sell. No matter when you buy or what happens in the meantime, over the long run the odds are still stacked in your favor.
