Investing

Why You Shouldn't Panic When the Market Drops

Stacy Rapacon

Happy new year? It might not seem like it for investors: The Dow Jones Industrial Average, a major stock market index, kicked off the first Monday of 2016 by tumbling more than 400 points – and had yet to recover by Wednesday.

The rout was attributed to a combination of factors, including China’s economy (where the main stock index plummeted nearly 7 percent on Monday), continuing tensions between Saudi Arabia and Iran, and rising interest rates in the U.S.

“Historically, when the Fed raises rates, we’ve seen more volatility follow in the market,” says Anthony David, a Washington, D.C.-based investment advisor with Morgan Stanley.

With all this action, it’s easy to understand why investors might want to bail. After all, most people are programmed to flee seemingly dangerous situations. “Days like [Monday] incite a lot of panic,” says Joe Eppy, a financial advisor and president of  the Florida-based financial firm, The Eppy Group. “But nothing good happens when you operate out of fear.”

While short-term market volatility may be scary, selling when stocks fall and trying to wait it out on the sidelines can create other problems, like figuring out when to get back in and missing out on a potential rebound. Panic can also force you to commit the cardinal sin of investing: buying high and selling low.

Instead, both David and Eppy advise their clients to stay calm and carry on. “The market will correct sooner or later,” Eppy says.

Over time, history has shown that sticking with your long-term plan is the strategy most likely to pay off. Take this example, illustrated by First Trust Advisors: Between January 2009 and September 2015, stocks stumbled numerous times for various reasons, including natural disasters like the Haiti earthquake and Hurricane Sandy, and man-made crises like government shutdowns and collapsing oil prices. Yet $10,000 invested in the Standard and Poor’s 500-stock index would have more than doubled to $24,571 over that time period, with an average annual total return of 14.25 percent.

So in the end, you might consider taking advantage of a selloff to buy low. “If you’re in it for the long haul and you don’t mind the volatility, [a market dip] is as good a time as any to buy,” David says.

Eppy likens the situation to a clothing sale. “Do you want to buy your clothes at the highest price or the lowest price you can find?” he asks. “[When the market drops], I take everything I have sitting in cash in my Roth 401(k) plan, and I invest it.”

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