On Thursday, Feb. 8, the Dow Jones Industrial Average (DJINDICES:^DJI) fell 1,033 points, marking its second four-digit drop of the week and sending the index more than 10% below the record highs it reached in late January. That makes the current downswing an official Dow correction, and many investors responded by showing signs of panic, selling off stocks at any cost.
Long-term investors know they need to weather storms like this periodically in order to enjoy the strong returns that the stock market has generated over time. To help you keep calm, here are nine reasons why you shouldn't panic about the Dow's big drop.
1. Even a 2,750-point drop is insignificant in the long run.
The chart below shows the Dow's performance over the past 10 years:
When you see things in this perspective, you can tell just how small the correction actually is.
2. The market first hit this level just three months ago.
As big as the Dow's drop seems to be, it has only taken the Dow back down to levels that it first hit in November. At the time, those were all-time record highs. It may seem disturbing that the market can lose three months' worth of gains in just a week or two, but most investors have hung onto the vast bulk of their profits from their longer-term investments.
3. In the long run, stock market gains have been inevitable.
Stocks can rise or fall in a single week, month, or year, but there's never been a 20-year period during which stocks lost money. If your time horizon is long enough, betting on stocks has always been a winner -- especially if you have the courage to buy after a big drop.
4. If you sell now, you're more likely to miss a top-performing market day.
Often, the best days for the stock market follow big drops. That was the case in 1929, 1987, and 2008, as well as earlier this week, when Tuesday's 567-point Dow gain came after its 1,175-point decline on Monday. If you panic-sell after a big single-day loss, you risk missing out on those rebounds, and that can cost you several percentage points of lost recovery gains.
5. Corrections are normal and (usually) frequent.
We haven't seen that many corrections in recent years, but that's an anomaly. Historically, 10% declines in the markets happened roughly once a year. That hasn't stopped the market from rising steadily over time.
6. Markets often bounce back in very little time.
You can see on the chart above that the Dow has gone through similar occurrences before, including in late 2015 and early 2016. Both times, the market dipped considerably but then came back very quickly. Severe downturns take longer to recover from, but even after the huge losses in the 2008 market meltdown, it only took a few years for the Dow to get back to where it had been previously.
7. If you want top performance, you must be willing to suffer losses.
When you look at the best-performing stocks since 2008, you'll see that shareholders have had to deal with pullbacks much greater than 10% in order to enjoy the life-changing gains they've produced over the long haul. If you sell out at the first sign of trouble, you'll get modest gains, but you'll miss out on the truly huge wins that these stocks offer.
8. You can finally go through your watch list.
For years, many investors have stayed on the sidelines hoping they'd get an opportunity to buy the stocks on their wish list at discount prices. If a stock you've wanted to buy for a long time is down considerably, then this is the moment you've been waiting for. Don't miss the chance.
9. You don't have to be a hero to win at investing.
Keep in mind that you don't have to put every penny of spare cash into the market just to take advantage of a short-term dip. If you're nervous about further losses, strategies like dollar-cost averaging let you take advantage of cheaper share prices now while gently easing yourself into the stock market. Committing regular amounts of money every month also lets you benefit if downturns last a while before a recovery kicks in.
It's easy to hide your head in the sand during a Dow correction. The smarter thing to do is to get over your immediate emotional response and be smart about your portfolio. Panic-selling is always a bad move, and smart investors are looking for opportunities to get into attractive investments at lower prices.
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