The stock market and its investors have at least one thing in common: They both hate uncertainty. But no matter how bad things get, there's one thing you can be certain about: You'll still have a chance to come out ahead in the long run.
When the holiday weekend ended, investors returned to work to discover big drops in world markets. Futures markets predicted that the Dow would drop 500 points first thing today, reviving memories of the 1987 market crash. If you've nervously held on to your stocks so far, you may be wondering how much more you can take before panic sets in.
Don't lose focus
Investors take comfort in the belief that through hard work and a thorough understanding of the investments they make, they can find companies that will perform well and reward their shareholders. Yet even if you're confident about your investment decisions, it's still really hard to stand your ground through the market's irrational jumps and lurches.
Now is a good time to look at your portfolio, and make sure you're comfortable with the reasons behind your purchases. As long as your reasoning was sound, don't second-guess yourself now. It's too easy to panic and dump a losing stock, and then see it rebound when the market comes to its senses.
Make a long-term commitment
Unfortunately, you can't count on a quick rebound. During a bull market, stocks are fun to own, and they seem to offer free money with no risk. Now, of course, the opposite seems true. It's hard to think in terms of reward if you invested at recent highs and lost 15%-20% of your initial investment.
But keep a couple of things in mind. First, if you keep adding new money to the market, falling prices may offer you better long-term returns. Yes, it might take years for you to get back to even on the money you invested last month or the month before. Yet the money you invest this month or next might show a quick profit if stocks rebound even modestly from their recent freefall. And even if this is the beginning of a long bear market, you're still getting a 15% discount from what you paid before by adding money now.
Second, keep in mind that in any bear market, a few stocks buck the trend. In the bear market from 2000 to 2002, for instance, tech stocks clearly took the worst hit:
|
Stock |
Total Return for 3 Years |
|---|---|
|
Microsoft (Nasdaq: MSFT) |
(55.7%) |
|
Intel (Nasdaq: INTC) |
(61.9%) |
|
Cisco Systems (Nasdaq: CSCO) |
(75.5%) |
But not everything fell. Some stocks did reasonably well over that three-year period:
|
Stock |
Total Return for 3 Years |
|---|---|
|
Deere (NYSE: DE) |
12.8% |
|
3M (NYSE: MMM) |
34.6% |
|
Lowe's (NYSE: LOW) |
26.4% |
That's not to say the same companies that did well from 2000 to 2002 will also outperform now if stocks keep falling sharply. It only shows that no matter how bad the market seems, there are pockets of good stocks -- if you know where to look.
Keep on pluggin' along
As a college student, I watched the 1987 market crash firsthand. I was convinced we would have another Great Depression. It didn't happen. In fact, it turned out to be one of the last great buying opportunities investors would have for the next decade.
If stocks keep falling now, I won't be terrified the way I was in 1987. I'll be ready to pounce on some stocks I've been watching over the years. Unless you think our economic system is doomed to failure, you'll eventually want to have your money in stocks, too. The only question is how much of a bargain you'll get.
For more on investing, read:
- Buying quality stocks on the cheap
- Finding winning stocks before they jump
- Following some simple steps to help you invest smarter.
