It takes a lot of work to pick winners consistently, and even more effort to keep yourself from selling them when markets sour. But that's exactly what you need to do when tumbles put your net worth at risk. Rather than looking for the exits, it can pay off to consider top stocks you don't already own -- especially top stocks in high-growth industries that usually bear the brunt of a sell-off.
First, a little perspective
Make no mistake about it: When markets are dropping, it's hard to keep your fingers away from the sell button. Our most basic instincts tell us to turn tail and run from danger, and it doesn't matter if that danger presents itself as a sabertooth tiger or a crashing account balance.
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Nevertheless, it's been proven time and time again that investors who hold onto stocks for the long term, rather than sell during downturns, come out ahead. Why? Because investors are horrible at timing when to buy back stocks after they've sold them.
You don't need to look hard to find examples of periods when it would've seemed smart to sell shares in top stocks to protect your profit in the moment, but actually doing so would've been a big mistake.
For instance, imagine selling Amazon.com when the S&P 500 declined 10% in 2000, or 13% in 2001, or even 23% in 2002? If you did, and you didn't buy it back at a lower price (and trust me, most people didn't), then you missed out on one of the best-performing stocks of the past 20 years.
Similarly, it wouldn't have been wise to sell Netflix when the S&P 500 fell 38% in 2008. It's returned more than 8,000% since then because of investments in original content and international expansion.
Admittedly, those are extreme examples, but even if you consider broad market returns, patience has paid off. Since the market low in March 2009, the S&P 500 is up more than 300%. Imagine missing most of that move.
Big one-day drops happen -- a lot
The 3.29% drop in the S&P 500 on Oct. 10 was undeniably unsettling, but declines of 3% or more happen more frequently than you probably realize.
The S&P 500 has lost at least 3% on 66 trading days since 2000, and since 2010, there have been 17 one-day drops of at least 3%, including two days in February 2018 and one day last week.
Instead of selling stocks because of these one-day drops, buying would've made more sense. Not only has the stock market gone on to reach new highs following those declines, it also hasn't taken long for investors to turn a profit. Since 2010, there were 12 times the S&P 500 was higher one month after a 3% decline, and the average gain was roughly 3%.
What to do next
We all have stocks we want to own but don't, and the best way to make sure those stocks are top of mind when markets fall is to write them down. If you don't have a watchlist yet, now's the perfect time to create one.
Personally, I've kept a watchlist of favorite stocks for over 20 years, and I'm continually pruning the list so it contains only my best ideas. For example, my watchlist currently contains the risky, but fast-growing technology companies Teledoc, Atlassian, and Zendesk. It also contains a value stock, Allergan, and an income stock, Store Capital.
Why do these stocks make my watchlist? Teladoc is revolutionizing access to affordable, on-demand primary healthcare; Atlassian's cloud-based tools are allowing people to collaborate on business projects regardless of where they're physically located; Zendesk's software is streamlining access to answers for commonly asked questions using artificial intelligence so companies can communicate better with customers; Botox-maker Allergan is trading at a historically low price-to-book ratio; and Store Capital's 4.4% dividend yield is attractive to me because it leases space to retailers that are insulated against e-commerce, such as gyms and childhood education providers.
It doesn't matter if these stocks (or any others) are on your watchlist, too. It only matters that you have a watchlist prepared before the next market drop -- and that you understand why you want to own each name on your list. Doing that puts you in a position to buy great stocks when they're on sale!
