What happened after 1929 was that so many people had been traumatized by the stock market crash that there was a lost generation. It was really only in the 1950s and '60s that enough years had passed that a new generation came along that had not been scarred by 1929 that rediscovered the stock market. -- Ron Chernow, author of The House of Morgan and The Warburgs
That's such a sad passage, and it simply reflects human nature. When we go through traumatic events, it can end up changing us -- for the better and/or worse. The 1929 stock market crash was an extreme event, followed as it was by the Great Depression. But we investors today will face stock market crashes of our own now and then -- and there are some things we shouldn't do at those times. Here are three such things.
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1. Don't panic
This is vital: Don't panic -- because market downturns and even crashes simply happen -- and not that infrequently. According to the Schwab Center for Financial Research, for example, the stock market experiences a "correction" -- a drop between 10% and 20% -- about every other year. (That's based on the 20 years between 2001 and 2021.) That might seem alarming -- until you realize that the stock market has recovered from most drops fairly quickly: "Despite these pullbacks, however, stocks rose in most years, with positive returns in all but 3 years and an average gain of approximately 7%." Stock market analytics company Yardeni Research looked at data going back to 1950, and found that stock market corrections happened about every 1.9 years, with 32 of them lasting less than a year and 24 lasting less than four months.
2. Don't focus on price instead of value
Stock market crashes tend to have many of us focusing closely on stock prices. We may note, for instance, that a certain holding has seen its stock price fall by 25%. We may read that the Dow Jones Industrial Average -- an index based on the stock prices of 30 companies (such as Apple, Nike, and Walmart) -- has dropped by 10%. That might start your heart palpitating, but stop and ask yourself whether those companies have really become worth 25% or 10% less. They probably haven't. It's just their stock prices that have dropped -- most likely, temporarily. So focus on the company's real value, not the stock's price. After all, your holding that dropped by 25% is probably still making and selling the same things to the same customers, while continuing to execute its growth strategy. It probably hasn't suddenly become 25% less valuable.
Of course, some stocks will drop in value for good reason now and then, such as if they post terrible quarterly results or they're embroiled in a big accounting scandal or a new competitor starts eating their lunch. In such cases, you might think about selling -- after you dig into the situation to determine whether the trouble seems fleeting or lasting and whether you are still confident about the company's growth potential.
If the drop seems mainly due to an overall market downturn, it's often best to just hang on.
3. Don't take a break from investing
Finally, not only should you avoid selling stocks in a panic when the market crashes -- you should also not just walk away for a short or long while. That's because market crashes often deliver great investment opportunities -- when the stocks of terrific and growing companies are temporarily on sale.
For best investing results, be ready for occasional market downturns. Be ready not to panic and be ready to pounce on opportunities if you can. You might keep a small portion of your portfolio in cash for such opportunities, and you might maintain a watch list of stocks you'd love to buy -- at the right price. (If you're regularly socking away a meaningful portion of your paycheck -- perhaps 10% or more -- into your investment account at a good brokerage, that can help you have cash handy.)
So expect market downturns and avoid these common and costly mistakes.
