Over the weekend, reports confirmed the spread of the COVID-19 outbreak into areas of South Korea and Italy. That sent stock market investors into a near panic, with pre-market futures contract trading suggesting a potential 900-point drop for the Dow Jones Industrial Average (^DJI -0.01%).
Steep moves like that inevitably make headlines, and can test the resolve of even the most experienced investors. Yet drops like this are also part of what any long-term investor has to get through in order to get the strong returns that they'll earn over time. Below, we'll look at five things to keep in mind as you decide how to handle your portfolio in light of the coronavirus news.
1. Three months ago, the market had never been this high
The Dow's drop is a big one, but it hasn't exactly put a dent in the bull market that long-term investors have experienced for more than a decade now. The Dow's first close above 28,000 came on Nov. 16, so even if the Dow closed down 1,000 points on Monday, it would only cost investors a small portion of the gains they've enjoyed over the long run.
Image source: Getty Images.
2. Selling after a big drop move has historically been a bad move
It's hard to weather a big down day in the market, but it happens. Here's one consolation: History gives us many examples of nice rebounds that have followed tough days. That happened during the major market crashes in 1929 and 1987, and there were several occasions during the financial crisis in 2008 and 2009 when huge bounces immediately followed massive downward moves. Panic-selling after the big drop means you'll miss out on any bounce that comes after, and that can leave you in a very difficult position when trying to decide how to get back into the market.
3. Don't lose your long-term confidence in the market
If you look too much at the risks involved in stock market investing in a single day -- or even a week or a month -- it can send you into a panic. Market ups and downs are ever-present, but when you look at longer-term horizons, you'll find it's rare for stocks to post losses. In fact, over long-enough periods, the broader market has never suffered losses. Investing during down periods can make it even more likely that you'll end up a winner.
4. Big point drops aren't that big a deal now
It's easy to think that today's big drop is a big deal, especially since an 800-point decline is so much larger than the then-record 508-point plunge in the Dow Jones Industrials on Black Monday in 1987. What's different, though, is that the Dow's drop in 1987 was more than 22%, with the Dow having started the day at 2,247. Now, the Dow is more than 12 times higher than that, so even a 900-point move is only about a 3% drop -- a pittance in percentage terms, and a degree of volatility that's much more common.
5. Now's your chance to buy cheap(er)
During a long bull market like the one we saw throughout the 2010s, many investors find themselves stuck on the sidelines, waiting in vain for a chance to buy stocks more cheaply. Big down days for the market can be great opportunities to look at your stock wish list to see whether you can pick up shares at a bargain price. You have to be prepared not to get the absolute bottom price, but you can rest assured that your patience at least kept you from buying at the top.
Stick with your plan
If you're nervous about the coronavirus and its impact on the stock market, you're not alone. But that doesn't mean you need to panic over it. By putting the drop in perspective and keeping yourself focused on the long run, you'll be able to avoid panic and keep yourself on track for the long-term rewards that investing brings.
