Over the last few days the stock markets around the world have done something they haven’t done in over a year: post a large negative return for a few days. The latest drop in the markets appears to be caused by the fear of interest rates going up in the near term. We’ve also read reports of a few leveraged volatility funds being forced sellers which exacerbated declines late in the day on Monday, February 5.
For those of us measuring our investment experience in decades, a large negative day on the stock market is nothing out of the ordinary. But if you haven’t experienced one it can be a bit of a shock, especially after a long period of low volatility. It’s a reminder that stock markets go down as well as up.
The last time the S&P500 was down more than -2% in a day was in September 2016, so we were definitely due for one. In 2017 there were only 4 days when that index was down more than -1%, which is very unusual.
So what should you do in a market downturn?
Review your investment goal and time frame.
If you have a long time frame (more than 10 years), market downturns will be nothing more than a blip in your rearview mirror. A long time frame allows you to weather market downturns since you have the time to allow your portfolio to recover. If you have a short time frame (less than 3 years) your account should be in a low risk portfolio.
Stop watching your portfolio every day.
If you normally only check your account once per month, don’t start doing it everyday. Over longer time frames, the volatility of the stock markets is less noticeable and you are less likely to panic sell.
Consider adding to your account.
If you have money that you were considering adding to your account, but have been waiting for whatever reason, now is a good time to do it. Investing when markets are down is an excellent way to help ensure you are buying at a discount.
Check the fees on your investments.
High fees act like an anchor during downturns, making it harder for your investments to recover their losses. Low cost investment options like online investment advisors can save you thousands.
What not to do
Notice what wasn’t on the list? The things the media often suggests: sell everything, sell specific investments, or generally panic. Downturns are the worst time to deviate from your investment plan, which often ends up making things worse. Markets, with very few exceptions, will most likely recover even large losses in a year or two. If you are invested in a well diversified portfolio suitable for your risk profile and investment time frame, then relax and stick to your plan.