This week started off rough for investors. The Dow Jones Industrial Average surrendered 1.8% en route to its worst single-day drop since July. The S&P 500, which declined 1.7%, recorded its worst loss since May, and the Nasdaq shed 2.2%.
Things weren't much better for the crypto crowd: Popular digital currencies bitcoin and ethereum were down about 8% and 9%, respectively, by the time stock markets closed, after showing midday declines in the double digits.
A range of investor worries are driving asset prices down, experts say, and the pullback has amplified worries that things could possibly get worse in the form of a correction, defined as a 10% decline from recent highs. If you're a young investor, that might be good news, says Jamie Cox, managing partner at Harris Financial Group. "Any investor with time — multiple decades — should use each and every correction as a buying opportunity," he says.
"Always consider corrections a gift," he adds. "You have the opportunity to buy what you always wanted to buy at a lower price." In other words, if you have a sound investment plan heading into a period of market turbulence, staying the course will allow you to boost your wealth over time.
Video by Helen Zhao
Here's what you need to know about the most recent market shakiness.
It's difficult to pinpoint one single factor that drove markets lower on Monday. Early headlines brought news of a stock market sell-off in China triggered by the potential default of property developer China Evergrande Group. The move may have spooked investors worried about the ripple effect on U.S. stocks in an increasingly global economy.
U.S. investors are worried about problems at home, too, says Cox. "Most of this is related to concerns over inflation, which we'll hear about in the Federal Reserve's press conference on Wednesday. Investors are unsettled about the possibility of tapering to deal with hotter-than-expected inflation," he says. "There's also this little problem in Congress that they can't seem to agree on anything."
Among the bills that politicians are debating is legislation that would raise the debt ceiling ahead of the approaching deadline, Cox points out. "That always creates a lot of drama," he says. "Investors sometimes make the decision to position themselves defensively."
All of these factors are coming into play in what has historically been a rough month for stocks. The S&P 500 has finished September in the red 55% of the time since WWII, according to CFRA, with an average decline of 0.56% — the worst average performance of any month.
Although several prominent digital currencies had a worse day than stocks percentagewise, a double-digit loss shouldn't send most crypto investors running for the hills, says Stéphane Ouellette, CEO of FRNT, a crypto-focused institutional capital markets platform. "You're probably not looking at this as a major break in the market," he says. "In crypto, you might think, 'This is the bottom end of a normal range.'"
Although stocks and cryptocurrencies don't always move in lockstep, investors can generally expect crypto prices to fall in response to a sharp decline in stock prices. "A lot of people are in the cryptocurrency market chasing gains, and if things go south, crypto is often the first thing they sell," Ouellette says. "It's not your nest egg, and you can buy and sell it 24/7. That makes it an easy place to go for cash."
During short-term sell-offs, often the best thing younger investors can do is, well, nothing. "If you're a long-duration investor, this is something that is going to be in your rearview mirror very soon," says Cox. "There is no utility at all in trying to trade around something that is going to resolve itself in short order."
Making sure you have a plan that you're willing to stick to now can also keep you from making poor investment decisions down the line.
For stock investors, making sure that your holdings are adequately diversified can keep a plunge in any single investment from tanking your portfolio. From there, making sure you have solid, long-term reasoning behind your investments can give you the confidence to add to your positions when they go on sale.
Video by Courtney Stith
"People get afraid and make emotional decisions to sell when prices go down," says Cox. "But if you loved a particular investment because of its fundamentals, you should love it even more at a cheaper price."
The same thinking applies to cryptocurrency investments, says Ouellette: "If you look at the relative valuations for bitcoin, you can come up with fundamental arguments why it's appropriate to hold long term."
A major pullback in crypto markets is "inevitable," Ouellette says, and when it comes, crypto investors are going to have to make a choice as to what's worth continuing to hold and what isn't. "If you have a strong understanding of what you're investing in and why you're investing in the first place," he says, "a large sell-off may represent a good time to buy."
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