The three major indexes have advanced from their bear market lows, but you may still be worried every time the market dips. After all, markets aren't completely predictable on a day-to-day basis, and additional declines are always possible. But before losing sleep about this, it's important to consider two things.
First, market phases come and go, and history shows us bear markets always lead to bull markets. Even better, history also shows the average bull market lasts much longer than the average bear market, offering investors more time to benefit. Second, you can prepare for any market environment, according to your investment style, and even take key steps as stocks decline to favor your portfolio's long-term performance.
This last bit is important because it means even in the worst market situation, you still maintain a certain amount of control over your future. So, if the stock market plummets tomorrow, instead of worrying, make these three moves.
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1. Don't panic and don't sell
These two ideas generally go hand in hand. When stocks drop, our first instinct may be to panic, and that triggers one thought: It's time to sell before stocks fall further and I lose even more money.
But here's a critical point to keep in mind: You haven't lost a dime if you haven't sold. Only selling will lock in those declines, and that's why it's never a good idea to rush out and sell a falling stock without thoroughly thinking it through.
Clearly, if a company's fundamental story just changed and you no longer believe in that company's future, you may decide to cut your losses and sell. But if declines are simply linked to the general market or economic environment, and the company's long-term story remains intact, you'll want to hold on.
As mentioned above, market phases are temporary, so today's struggling stocks could become tomorrow's winners.
2. Look for opportunities
Now that's you've decided not to panic, you're in the perfect frame of mind to take the next step. And that involves looking for potential stocks to buy. That's because, when markets tumble, many quality players drop too, meaning you can get in on them dirt cheap.
Think of it as going shopping on Black Friday for deals on items you plan on keeping for a very long time. They're trading for a discount today, and you'll benefit from your purchase over time.
Of course, you may hesitate, thinking these particular stocks may extend their declines -- and they might. But it's impossible to time the market, selling at the high and buying at the low. So, as long as you get in on a strong company for what seems to be a fair price considering its long-term story, you're making a smart move that could deliver rewards over time.
Your investment choices should depend on your investment style and comfort with risk. If you're a cautious investor, you may aim to reinforce your position in dividend stocks like Coca-Cola (KO) or safe plays such as pharmaceutical companies with steady earnings, for example, Johnson & Johnson (JNJ -0.46%). If you're an aggressive investor, you might go for high-growth stocks like Tesla (TSLA -1.11%) or Amazon (AMZN 3.43%).
3. Think long term
Finally, whether you're adding stocks to your portfolio, reinforcing positions, or simply waiting for your portfolio to recover and grow -- think long term. Look at each potential and current position through a long-term lens.
This will help you make the right investment decisions, so you'll maximize your return potential over the long run. With a long-term attitude, you won't hesitate to sell a particular player that you strongly believe will hurt your performance over time -- and you won't regret that move. At the same time, you'll hold onto certain struggling players without hesitation, because you understand that over time their businesses will excel.
By long term, I mean at least five years. That gives strong companies plenty of time to recover from a tough market phase, and it gives you plenty of time to benefit. As a long-term investor, remember this: Time is one of your best friends.
