I remember the first time I flew on an airplane after many years of not having done so. Suddenly, as tends to happen in these situations, the flight went from smooth to extremely bumpy out of nowhere, and I began to panic. The friends I was traveling with tried to ease my fears. One grabbed me a drink of water, while the other clutched my hand. But my friend who was a frequent flyer said the one thing that finally calmed me down: "This is normal."
Fast forward many years to yesterday. The Dow plunged 724 points as a reaction to looming tariffs on China and ensuing trade-war fears. It wasn't the first major hit the index has taken in recent weeks. But once the news broke, a friend called me and asked if he should start dumping some of his investments before things got worse.
He was panicking, of course, which makes perfect sense -- he had only started investing a year or so ago and wasn't yet used to the level of volatility we've seen over the past couple of months.
And yes, it's been a rocky couple of months. Back on Feb. 5, the Dow experienced its largest single-day drop in history, plummeting 1,175 points. Then, in late February into early March, it dropped another 1,100 points over a three-day span. Yesterday's plunge was just the latest in a string of recent dips, but when my friend started losing his cool, I thought back to the that flight and the words that prevented an all-out panic attack: "This is normal."
Stock market volatility is nothing new. Since 1950, there have been 36 corrections in which values dropped 10% or more. But not counting the one we're in the midst of at present, the market has also recovered from each and every one. So if you're watching the news wondering whether you ought to fret, the answer is: Absolutely not. This is normal.
Don't react to market news
Seeing the value of your investments decrease overnight, and substantially so, is no doubt unsettling. But one thing you must realize is that until you actually go out and sell off your investments, you haven't actually lost any money. When you check your portfolio balance in the midst of a market downturn, what you're seeing is the current value of your investments at a single point in time -- in other words, the amount you'd get if you sold them that day. But if you don't sell them, there's a very good chance they'll come back up.
One of the easiest ways to lose money in the stock market is to react to negative news, and one of the best ways to make money in the stock market is to be patient and long-term oriented. Historically, the stock market has been up much more than it's been down, and if you leave your investments alone over a lengthy period of time, you're more likely than not to come out ahead.
Now, when it comes to your emergency savings -- the money you need on hand for a sudden unplanned circumstance or bill -- the bank is your safest bet, as opposed to the stock market. That's because you might run into a situation where you need to withdraw funds suddenly, and if you're forced to liquidate an investment during a downturn, you do indeed stand to lose money. But if you're talking about money that's invested for retirement or another far-off point in the future, you don't need to stress over yesterday's dive, or even the broader volatility the market has faced since the start of February. Because this is all normal.
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