Lately, the market has been bucking like a wild bull. Just a month ago, the Dow was trading at a record 14,000. Then, over the next couple of weeks, it fell by 800 points. It bounced back to regain about 500 of those points. But that didn't last, when it suddenly dropped back down to below 13,000.
If you're getting the impression that the stock market is starting to rise and fall somewhat more significantly, you're right. Lately, those moves have been much more dramatic. But they've also been short-lived. In February, the Dow fell more than 400 points in a single day, from about 12,632 to 12,216 (that's 3.3%). But it then recovered fairly quickly and surpassed its pre-drop level in fewer than two months.
These recent surges and plunges have me a little worried -- because I'm afraid that many investors, especially those new to the market, are getting the wrong idea. Yes, the market can drop sharply and suddenly. And yes, it can recover very quickly, too. A 200-point drop can easily be followed by an equally dramatic surge. But here's something to remember: The market also might not recover for quite a while. It can, in fact, take years for a market to recover to its pre-drop levels.
Keep in mind ...
So what should you do with that information?
- For starters, know that when you see statistics related to "the Dow," they refer to a collection of just 30 companies. That's all the Dow is -- 30 out of many thousands of publicly traded businesses. It includes big names such as Procter & Gamble
(NYSE:PG)and Pfizer (NYSE:PFE), for example, but leaves out plenty of other household names. Consider focusing instead on a broader index, such as the S&P 500, which adds other large companies such as Cisco Systems (NASDAQ:CSCO)and Apple (NASDAQ:AAPL)that haven't made it into the Dow.
- Don't keep money in the stock market that you plan to need within five years (or, to be even safer, 10 years). If you'll want to make a down payment on a home in 2009, you don't want to end up in the middle of a deep market decline, with your holdings worth a lot less than they were a few years earlier. You'll have to sell more of your shares to get the money you need.
- Don't panic when the market slumps. The market always recovers -- eventually. Regardless of how quick or slow the recovery is, unless your reasons for buying and owning various stocks have really changed, selling is likely a bad idea.
- Remember that when stocks are down, it's a good time to put money into the market. One of the best things to do in a market slump is to look for attractive opportunities. After all, a down market means that many stocks are on sale, trading at unusually low prices.
Make a list
Here's one last bit of advice: You can prepare for market drops by building and maintaining a watch list of attractive stocks. An online watch list works much like an online portfolio. (You can set up digital portfolios for yourself at many websites, such as Yahoo! Finance or AOL.) On mine, whenever I add a company, I pretend that I've bought one share at the stock's going price that day. From then on, I'll be able to see how much the stock has risen or fallen in value since I first noticed it. If it was attractive in some ways before, it may well be much more attractive in the future, if I notice that it has fallen by, say, 20%.
For more ideas about compelling companies to buy now or add to your watch list, I encourage you to try out one of our market-beating newsletter services, such as our flagship Motley Fool Stock Advisor. A free trial will give you full access to past issues, so you can read about each recommendation in detail.
Longtime Fool contributor Selena Maranjian doesn't owns shares of the companies mentioned in this article. Pfizer is a Motley Fool Inside Value recommendation. Try any of our investing services free for 30 days. The Motley Fool isFools writing for Fools.