Did yesterday's market drop make you feel queasy? Did the Dow's 400-point loss make you think that now might be a time to sell off your holdings before they go even lower? When the clouds darken, do you get fearful?
A yes to any of these questions means you need to reassess your investing fortitude. We all know investing is risky, but we hope that the rewards we can reap will pay us handsomely for taking on that risk. Yet when we're actually confronted with that risk, it often makes us think that perhaps money market accounts or our mattresses are better places for our cash.
Look at some of the wreckage on the Dow from yesterday. Disney (NYSE:DIS) fell 5.7%, General Motors was off 5.3%, and Caterpillar was down 3.6% on the day.
The rise and fall and rise of stocks
When you look at what happened, though, you see that despite the splashy headlines of 400-point drops, it actually only amounted to a 3% loss overall. Don't get caught up with the number movements; the percentage is more relevant.
Yet even if the percentage move was much greater -- some Dow components dropped more than the index, after all -- it's still no reason to panic. Stocks rise and fall. Sometimes dramatically so. But the 80-year history of the market has always been up. Whether it was the Great Depression, the bear market of 1973-1974, the big drop in 1987, or the dot-com bust of 2000, the markets have always recovered. Sometimes it takes longer than others, but remember that the markets do come back. It gives you some perspective.
More importantly, any sickly feeling you may have experienced yesterday means that maybe you also need to look at how you're invested. It also might mean it's time to invest more.
Market's down? Let's go shopping!
More? Yep, when stocks are down, that's a great time to go shopping. You like to buy shirts on sale and get 18 eggs for the price of a dozen. Well, you should look at falling stock prices in much the same way -- consider that the companies they represent are holding a sale. It might even be a good time to review whether you're putting away enough in your retirement accounts. Are you maxing out your 401(k)? When stocks are battered, it's a great time for your autopilot savings program to be picking up more shares.
Diversify for safety
Are you diversified? While huge swaths of the market dropped yesterday, not every stock did. RadioShack (NYSE:RSH) jumped nearly 12%, while aesthetic-laser maker Syneron Medical (NASDAQ:ELOS) was up more than 6% for the day. Holding just a small basket of stocks or mutual funds might make you a focused investor, but it also heightens the risks your portfolio faces when the markets decline. Diversifying your holdings by choosing quality stocks across a broad spectrum of the market can minimize the pain when boom turns to bust.
Look to the horizon
Of course, we want to make sure that we have a long enough time horizon when we're investing. Any money you might need within the next three to five years should probably not be in the stock market, because a market crash -- or even a slight setback -- could occur just when you need the money the most. Stocks are for long-term goals, not near-term needs.
The other horizon we should see is the markets that exist overseas. Sure, it was the Chinese markets that got the ball rolling downhill, and other European and Asian markets fell in sympathy. But spreading your investments over many countries helps minimize any softness experienced in one or the other. There tends to be an inverse relationship between domestic and foreign markets. When the U.S. is up, others may lag, and vice versa.
These simple steps can help you steady your nerves when markets get rollicking:
- Despite setbacks, stocks have always come back.
- When stocks prices drop, go shopping.
- Not all stocks drop at the same time. Diversify your portfolio.
- Make sure you're investing for the long term.
- Look at overseas investment possibilities.
Keeping these points in mind, you'll find yourself getting excited instead of anxious when stock prices fall. You'll see there are all sorts of great investments, both here and abroad, amongst small caps and large caps, that have suddenly become very affordable. It's a perfect time to start feeling greedy.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
