Last week, the stock market set a number of records, albeit not the type that investors are going to be thrilled with.
On Monday and Tuesday, Feb. 24 and 25, the history-rich Dow Jones Industrial Average (^DJI 1.05%) declined by more than 1,900 points, marking the largest two-day point decline in the 123-year history of the index. This was followed by the Dow, technology-heavy Nasdaq Composite (^IXIC 0.90%), and benchmark S&P 500 (^GSPC 1.05%) all turning in their largest single-day point losses in history on Thursday, Feb. 27. When the curtain closed on this volatile trading session, the Dow, Nasdaq, and S&P 500 had lost 1,191, 414, and 138 points, respectively.
As the icing on the cake, the speed with which the stock market has entered official correction territory (i.e., a non-rounded decline of at least 10% from a recent high) is a new record. It took just six trading sessions and eight calendar days for all three indexes to lose a double-digit percentage of their value.
As you can probably imagine, there weren't a lot of safe-havens investments for investors to choose from last week, and the spread of COVID-19 takes most of the blame for that.
COVID-19 is the official name for the lung-focused novel coronavirus that originated in Wuhan, within China's Hubei province, and has infected more than 82,000 people in 50 countries. What's worrisome, though, is that the number of newly reported cases outside of China is growing rapidly, leading to the very real possibility that the World Health Organization will declare COVID-19 a pandemic.
Aside from having a mortality rate of around 2%, and therefore being a serious threat to human well-being, COVID-19 is the proverbial monkey wrench that could be thrown into global supply chains. It's what can drive consumer spending down, lower the demand for global oil, and more broadly send important economies into recession.
You only lose money if you sell your position at a loss
With all this being said, you'd probably assume that I wound up losing quite a bit of money during last week's stock market beatdown. Well, brace yourself, because I actually wound up losing nothing. Zero. Zilch. Nada!
I assure you, I am invested in the market, so I didn't pull my cash out and resort to swimming in a vault full of gold coins, a la Scrooge McDuck in Ducktales.
The simple reason I didn't lose money last week is that I chose not to panic-sell and head for the sidelines. In spite of the steepest one-week drop in equities in quite some time, there's a far more important figure that sits at the forefront of my mind. That being the number 37.
Before this past week, the broad-based S&P 500 had undergone 37 official corrections since the beginning of 1950. This works out to a correction about every 1.89 years, on average, making downward moves in the market a bit more commonplace than you might realize at first.
What stands out, though, is that each and every one of these corrections in the S&P 500 (37 out of 37) has been completely wiped away by a bull-market rally. Sometimes it takes just weeks to put a correction in the rearview mirror, whereas it can take years for steeper retracements. Regardless of the time frame, the story is always the same: the stock market increases in value over the long run.
This means that if you buy high-quality businesses and give them a proper period of time to perform (a minimum of five years), you have a very good chance to increase your wealth.
Only sell when it makes sense -- not based on emotion
Understandably, there are times when selling a stock does make sense. As an example, if you need money right now to pay a bill, then selling a stock, even at a loss, might make sense.
Likewise, it could be time to part ways with a stock if it no longer holds up to your initial investment thesis. While you certainly don't need a stock market correction to give you the motivation to review your holdings, a sudden move in the market does have a tendency to spur action on the part of investors. If, after review, a company's business model or outlook no longer matches what you're looking for, selling may be the appropriate choice.
Another example where selling might make sense is an effort to rebalance your portfolio. For instance, if one position increases in value substantially, it might become too large a percentage of your portfolio. Selling some of that position to invest in other areas may be prudent.
What absolutely doesn't make sense is simply heading for the sidelines because the stock market had a few bad days. Not only is it unlikely that the long-term growth prospects for nearly all public companies haven't changed over the past week, those folks who choose to sell and are effectively trying to time the market could very easily miss out on some of the biggest single-day percentage gains we'll see on the way back up.
Remember, folks, you only lose money if you sell a stock at a loss.