Anyone who's familiar with the stock market knows what a volatile beast it can be. Case in point: The Dow dropped a historic 1,175 points on a single day back in early February, and it followed that up with an 1,100-point plunge over a three-day period beginning later last month. It's not surprising, then, that roughly a quarter of Americans expect the market to lose value over the coming year.
In fact, COUNTRY Financial reports that 52% of Americans say they have a plan for dealing with another major market plunge. But whether that's really necessary is a different story.
Market tumbles are extremely common
If you're new to the stock market, the idea of a major decline might easily throw you for a loop. After all, nobody wants to face the prospect of losing money. But anyone who's had money in the market for quite some time will tell you this: Plunges are actually quite common.
In fact, since 1950, there have been 36 stock market corrections in which values dropped 10% or more. This figure includes the current correction the Dow and broader S&P 500 have recently undergone. But here's the thing about those corrections: Not only are they common, but with the exception of the one currently under way, the stock market has recovered each and every time.
So, what's the best way to deal with a stock market correction? Do nothing. Don't make a plan to sell off assets or move money around. Just let things play out.
When the market takes a dive and your portfolio value goes down, what you're really looking at is a loss on paper (or, these days, a loss on your computer screen). Yes, you might log on to your account and see that your investments are worth less than what they were valued at a few days prior. But remember this: Until you actually go and sell off investments, you haven't lost a dime.
The best way to deal with a stock market dive, therefore, is to not react. The reason? You're highly likely to lose money by unloading investments when their value drops. On the other hand, if you sit tight and wait things out, your portfolio value is likely to recover, and then some.
Remember, too, that if history tells us anything, it's that we spend more time in an up market than a down one. Incidentally, that's why it pays to take a long-term approach to investing. If you're looking to make a quick buck in the stock market, you're likely to get burned. But if you're in it for the long haul, you're more likely than not to come out ahead -- provided you leave your investments alone when things go sour.
Will there be another market downturn?
If you're wondering whether you should brace yourself for another market tumble, the answer is: Absolutely. Whether it happens this year, next year, or the year after that is almost irrelevant. Over time, the market will fall. But the best thing you can do to get ready for it is diversify your portfolio and prepare to be patient. This means investing in various sectors of the market, rather than putting all of your eggs into a single industry. It also means loading up on index funds, which offer built-in diversification. And, yes, it means putting some bonds in your portfolio, especially if you're older and nearing retirement.
Speaking of which, though stocks remain a suitable investment for current or near-retirees, if you're older, you do need a backup plan to protect yourself from market downturns. This could mean moving more investments into bonds, or loading up on dividend stocks, which can serve as a source of income even when the market itself isn't doing well. But if you're younger and are heavily invested in stocks, then there's really not much action to take in the face of the aforementioned volatility other than amassing a diverse range of assets.
Maybe the stock market will end up having a killer year in 2018. Or maybe not. Either way, be prepared to leave your investments alone as we all ride it out.