What goes up must come down. Or so the saying goes. Just like the sun sets each day, a tossed ball falls to the ground, and historically, a rising stock market eventually dips down.
Though markets have been on the rise for more than a decade, they’re now stumbling. And those losses can cause some investors to fret that the current ups and downs could be the beginning of a bear market.
To get through stock market dips with your wits (and portfolio) intact, it can be helpful to get a little perspective and not make any sudden moves motivated by fear or emotion.
Maintain Your Cool During Stock Market Dips
Accept that market drops are normal. Historically, when you look at stocks over the long term, the trend has been for stocks to climb higher, interspersed with short periods of declines. Consider this: Between October 2002 and September 2007, the Standard & Poor’s 500 was up 52 percent. Then from October 2007 to March 2009, it lost more than 51 percent of its value. Since then, from April 2009 to the end of 2017, the S&P 500 was up 118 percent.
In this instance, periods of growth were longer and larger than the downturn. This pattern is the historical norm.
Years from now, you may not even remember this period of stock decline — even if it does feel scary today. After a decades’ long rally, it’s only natural that stock prices would take a breather.
Pro tip: Financial experts refer to a short-term downturn of at least 10 percent as a correction.
Know What Creates Uncertainty
Aside from normal price adjustments, specific events can cause market turmoil.
Markets dislike uncertainty. And things can be particularly uncertain right before an election because it’s unclear which candidate’s and party’s economic view will prevail.
For example, in 2016, the S&P 500 surged 23 percent post-election to the end of the year. A clearer sense of what’s next brought calm to the markets.
Other factors affecting markets can be tariffs and tough talk on trade. Markets typically thrive on free trade and if there’s a perception that it could be curtailed, stocks historically fall. For example, in 2002, the U.S. imposed steel tariffs (excluding Canada and Mexico). In the wake of the European Union’s threatened retaliation, stocks fell.
You have no control over the many causes of market volatility. But you can choose how you respond.
The smartest move for your portfolio? Keep your emotions in check. One of the worst things you can do is panic and sell your stocks based on fear since it’s impossible to time the market’s ups and downs.
But that doesn’t mean you should sit idly by and do nothing during a downturn. Instead, consider the following:
• Reevaluate: Examine your investments. Is your investing approach up-to-date and tailored to your risk tolerance, investment goals, and time frame?
• Adjust, if necessary: If your portfolio doesn’t align with your investment profile, make changes to better position your investments for all market conditions. Ally Invest professionals can help you create and regularly rebalance a diverse Managed Portfolio that’s based on your risk tolerance, projected length of investment, and wealth outlook.
• Go shopping: If you can stomach market slumps and have cash on hand, consider taking advantage of the downturn by purchasing more stocks, bonds, mutual funds, or ETFs. You’ll be buying at a discount.
Turbulent market conditions are a part of investing. But just because the market trends downward that doesn’t mean it’s time to grab your parachute and head for the nearest exit. Instead, tighten your seat belt, know your safety measures, and, likely, you’ll find smoother conditions ahead.