Thursday's decline of 231 points for the Dow Jones Industrials (DJINDICES:^DJI) came as a shock to some investors today, given the market's past resilience even in the face of escalating tensions in Ukraine, and signs of economic deterioration in China. But before you start making wholesale changes to your long-term investment strategy, there are several reasons why, even if the Dow and the broader stock market fall further from here, making emotionally driven decisions now could cause a whole lot of regret later. Let's look at three of them.
1. Trying to time the market when declines are orderly is almost impossible.
The temptation when a stock market decline begins is to sell immediately in the hopes of minimizing your losses. Unfortunately, you'll only know whether a long-term decline actually did begin in hindsight.
For instance, turn the clock back to February 3, when the Dow lost more than 325 points. At that point, many people expected further declines and, therefore, sold their stocks. Yet, in doing so, they missed out on a 1,000-point move upward in the ensuing month. Selling in the hopes of buying back later at a lower price can leave you trapped with cash on the sidelines and missed profit opportunities.
2. Basing stock selections on risk tolerance is still working.
When the market falls, investors often turn to defensively oriented stocks for shelter. That strategy worked today; even though all 30 stocks in the Dow fell, Procter & Gamble (NYSE:PG) and AT&T (NYSE:T) -- two stocks known more for their stability than for their growth prospects -- posted only small losses. On the other hand, high-growth powerhouse and Dow giant Visa (NYSE:V) was among the biggest losers on the day, as investors reined in lofty expectations for the card-giant's future.
There's no guarantee that these relationships will hold up in an extended decline. During the 2008 financial crisis, many stocks that investors had previously seen as bear-proof posted huge drops, hurting investors who had counted on their defensive characteristics. But at least for now, the fact that defensive strategies are still working should help you keep from panicking.
3. You can look forward to picking up some bargains.
Most investors love it when stocks rise, and hate it when stocks fall. But for long-term investors who still expect to invest substantial amounts of money in the future, the opposite should be true: You should root for stocks to fall so that you can get as many shares as possible with your money. Declines like today's are only painful if you focus on the money you already have invested and, as you get closer to retirement, you become more dependent on stocks staying healthy. But if you have a decade or more to go before you retire, and plan to put a lot more money into the market during your remaining years of work, then a 231-point drop in the Dow should whet your appetite to get a shopping list ready in the hopes of even bigger declines ahead.
Be smart with your money
Bull markets don't last forever, and it's smart to be prudent about the potential for stock market losses. But don't let single-day declines drive your investing. Take a longer-term view instead, and you'll end up being much happier with the results.