May's huge stock-market declines came as a big shock to many investors. The big down day for stocks, last Friday served as an exclamation point on what has turned into a quick 10% correction for the Nasdaq in just the past month, and for the S&P since the beginning of April.
Those who follow this column may recall that about six weeks ago, before May's big market drop, I urged investors to figure out the answers to three questions before the next plunge. Those who heeded that call are now in a much better situation than they may have been otherwise, and while I certainly didn't know that a big decline for stocks would come so quickly, being prepared for whatever the market may throw at you is always a smart move.
Now that the correction has actually happened, the obvious question is what to do. Before addressing that, though, you should consider what it's definitely not time to do:
- Don't panic-sell. Back in April, when stocks were trading at multiyear highs, those who wanted to reduce their risk had a golden opportunity to lighten their exposure to stocks. Now, though, you'd no longer be selling high -- and it's much more important to take a measured approach to your investing strategy, rather than simply making a knee-jerk reaction.
- Don't panic-buy. On the other hand, you shouldn't look at Friday's 275-point drop in the Dow as an automatic invitation to spend every last dollar of spare cash you have to get back into stocks. Although the market has dropped fast and furiously, anyone who hasn't completely forgotten the bear market of 2008 and 2009 knows that a 10% correction can be just the tip of the iceberg in uncertain times.
- Don't stick your head in the sand. Four years ago, too many investors weren't equipped to handle a major decline and therefore checked out of paying attention to their investments at all. Although holding on throughout the market meltdown and the ensuing recovery turned out to be OK, a well-considered financial plan can give you much better results.
In other words, no matter what you do now, don't do it without thinking about it. Only by staying aware of what's going on and calmly, unemotionally analyzing what it means for your portfolio will you earn the best returns you can.
The smart move
By contrast, what you should do depends on your situation. If you didn't take the opportunity in April to reduce your risk and now find yourself needing to do so, then consider some of the more defensively oriented stocks that have held up reasonably well during the market's swoon. Flowers Foods
On the other hand, if you have money you want to invest, the buying opportunity you've waited for is starting to materialize. Take a look at the most beaten-down parts of the market and compare current values to your long-term assessment of the industries involved. One example is natural resources, where even huge players BHP Billiton
Another play on Asian growth is in the casino industry. Las Vegas Sands
It's time to make money
For months, investors have helplessly watched as prices moved higher and higher, even as uncertainties mounted. But now, you finally have a chance to look for smart opportunities. Not every stock is a good bargain right now, but if you have money to put in the market, you should start looking. You may really like what you see.
If you'd like some more ideas of stocks to keep an eye on, The Motley Fool's special report on long-term investing has what you want. With general ideas on how to assess investment opportunities, along with three solid names to consider for your portfolio, you shouldn't miss out on what the report has to say. Let me invite you to click here and start reading your free copy right now.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.