15 Reasons Not to Panic When the Stock Market Drops

More than a year on from the stock market crash of March 2020, investors are still concerned that another downturn is imminent. In the period since last year’s crash, the market has delivered unprecedented gains over and over again.

At the same time, top stocks across sectors like tech and healthcare have also reached equally historical highs. You’re not alone if you’re wondering just how long these trends can continue before another crash or correction occurs.

While no one can predict with precise accuracy whether or not another stock market drop is in the offing, it’s highly possible that a decline could be approaching in the near future. Here are 15 excellent reasons why you shouldn’t panic when the stock market drops again.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Just because the stock market nose-dives doesn’t suddenly mean that good investment opportunities dry up. In fact, quite the opposite is true. When the market crashes or corrects, shrewd investors can seize the opportunity to snag discounted shares of popular stocks that usually come at a much higher premium.

Market crashes aren’t just an opportunity for investors to buy stocks on sale and expand their portfolio’s long-term potential. The market crash of 2020 also showed investors that certain stocks flourish in tumultuous conditions. When these conditions drive investors to buy up shares of premium stocks that display recession-resilient qualities, existing shareholders can reap remarkable profits.

ALSO READ: Next Stock Market Crash: 2 Bulletproof Value Stocks to Buy

The reality of investing is that the stock market is cyclical. Long-term investors understand that there’s always a certain level of risk that comes with trading stocks, and that market highs and lows will occur. However, there’s a definite upside to this reality.

Investors who maintain a long-term focus and refuse to give into market panic can seize prime buying opportunities in times of market downturn. And if your investing strategy tends to be more conservative, you can always choose to simply wait out any market correction and hold off buying new stocks until the volatility subsides.

A long-term buy-and-hold mentality coupled with a diverse stock-buying approach can see you through any market predicament. A stock market drop doesn’t mean you suddenly need to reverse your investment strategy. Always remember that market crashes or corrections are temporary and that recovery will happen at some point in the future.

The worst thing you can do for your portfolio in volatile market times is to throw your long-term investment strategy to the wind or rush to sell off investments that have suddenly declined in value. Unless your overall, longer-term assessment about a particular investment has changed, a market crash is rarely the time to make radical changes to your basket of stocks.

Instead, assuming you have a solid nest egg to fall back on, use a market downturn as an opportunity to continue buying shares of quality stocks. And when in doubt, better to sit back and do nothing until the market recovers than to make questionable investment decisions.

As an investor, you should not only accept that market uncertainty is inevitable but also factor this reality into your thinking when deciding which stocks to buy. Focus on filling your basket of stocks with a diverse selection of companies that you truly feel comfortable holding regardless of what the market is doing. This will ensure your portfolio is adequately prepared for a market drop and give you greater confidence when the market turns volatile.

ALSO READ: 3 Unstoppable Stocks I Can't Wait to Buy in the Next Stock Market Crash

Simply put, panic is one of your worst enemies during a market correction or crash. Negative, fear-based emotions can easily tempt you to throw caution to the wind and could lead you to make unwise investment decisions when the market is struggling.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Another reason not to panic when the stock market drops is that there’s nothing forcing you to take decisive action during these market periods. If you’re confident with the stock choices you’ve made and you don’t see any particularly compelling investment opportunities at the moment, or your nest egg is lacking, better to sit back and wait until the market’s rebounded a bit before adding new companies to your portfolio.

During a market downturn, even the highest caliber of stocks sometimes see share prices plummet temporarily. If you’ve had your eye on a particular company for some time but its share price has made you hesitate, a market drop can be the perfect time to buy, assuming your other financial affairs are in order.

A market crash or correction can also provide a prime opportunity to buy additional shares of a stock you already own at a much cheaper price than usual.

ALSO READ: Worried About Another Crash? Buy This Stock

Short-term headwinds shouldn’t inform your investment decisions. It’s reasonable to expect that your portfolio might see a certain level of immediate decline if the market drops.

If you invest with a long-term perspective and have filled your basket of stocks with a diverse array of quality investments, you can rest confident in the resilience of your portfolio even when the market is on the downswing.

Stock market crashes or corrections often bring certain high-risk, high-reward investments to the forefront of investors’ radars and make shareholders rich in the process.

Take a company like Novavax (NASDAQ: NVAX), for example. Before the pandemic, Novavax was a little-known vaccine company. As the COVID-19 vaccine race kicked off and its vaccine candidate rose to prominence, Novavax saw share prices skyrocket and shareholders became considerably wealthier in the process.

High-risk stocks shouldn’t make up the lion’s share of your portfolio, and should always be counterbalanced by a solid majority of more conservative, recession-resilient investments. However, a few well-reasoned investments in stocks with higher-volatility characteristics and long-term growth potential can pay off big-time both when the market is down and in periods of recovery and market normalcy.

Just as predicting a market crash with exact certainty is impossible, the precise timeline for recovery is also unknowable. The good news is that the market will recover. Historically, the market typically takes anywhere from 12 months to a few years to recover to its precrash conditions. This period is often also accompanied by a series of new highs, with the market events of the past year being a prime example of this recovery pattern.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

If your investment focus is geared toward the long-term horizon, short-term market movements or declines shouldn’t be all that concerning. When you buy a stock, you should be committed to holding that stock in your portfolio for at least three to five years, and preferably even longer.

If you’re considering a stock but aren’t comfortable keeping it in your portfolio for that minimum period, you’re likely better off considering other investments.

When you hold any potential investments to this basic three- to five-year standard, you’ll reduce the temptation to scoop up fad buys and instead focus on quality stocks that bring long-term value to your portfolio.

ALSO READ: Got $5,000? 2 Tech Stocks to Buy in a Market Crash

Whether another market crash is months or years away, if you aren’t already doing so, focus on developing a solid savings strategy with a diverse method of asset allocation.

Building a reliable nest egg through a combination of sources such as cash savings, retirement accounts, dividend stocks, growth stocks, value stocks, bonds, and other investments ensures that your money isn’t tied up in one place.

This also means that if a crash happens, you won’t have to worry about your nest egg being tethered to a single source that could make your finances particularly vulnerable to market headwinds.

Investors can take comfort in the fact that most market downturns are fairly short-lived. In the case of the coronavirus pandemic stock market crash, full recovery occurred in just a few months.

If you’re focusing your investment strategy on high-quality companies that pass the muster of fundamental analysis, a short-term market drop shouldn’t change your conclusion about the long-term potential of the stocks in your portfolio.

Even high-quality stocks see share prices plummet in response to investor panic during a market downturn. Savvy investors know to simply wait out the period of volatility to avoid selling at a loss. If you have enough available liquidity when the stock market drops, you can also seize on the opportunity to buy premium stocks poised for a robust rebound.

ALSO READ: Worried About a Stock Market Crash? Make This 1 Important Move

Stock market volatility doesn’t have to be an investor’s enemy. Besides presenting some prime buying opportunities, a market storm can make it easier for investors to discern the wheat from the chaff.

Case in point, the market crash of 2020 exposed the distinct vulnerabilities of many popular stocks, while revealing a host of recession-proof buys that didn’t just ride out the volatility but flourished in spite of it. If you’re worried about another crash, focus on adding more all-weather stocks to your portfolio that can sustain growth in all types of market environments.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

It’s perfectly natural to initially feel disconcerted when the market crashes. After all, it’s no fun to watch the investments you’ve grown over the years with your hard-earned cash simply drop overnight.

Now more than ever before, investors should focus on building a rock-solid portfolio with a pattern of diversification that can deliver strong, long-term performance during both market highs and lows. If the market does crash again, remember to stay calm, avoid the urge to panic and sell, and if you can, keep investing.

Rachel Warren has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.