What to Do When the Stock Market Tumbles?

If you haven’t noticed, the stock market has been doing quite a bit of falling lately. A lot of people are freaking out, but you really shouldn’t worry too much. The market will eventually turn back upward. The key is just being patient. Yes, it sucks that currently you may have suffered some losses, but you’ll make the money back over time.

There are three approaches to dealing with a market downturn that I endorse:

1. Predict it perfectly and sell everything beforehand. Buy back in right when the market starts going up again. Risk: High(cause it’s really hard to do!) Reward: High
2. Sell a little bit (NOT EVERYTHING YOU OWN) at the beginning of the market downturn if you feel that it will keep going down, then buy back in after the market starts recovering. Risk: Medium Reward: Medium
• The danger is that you could get out of the market too late and get in too early and lose money versus strategy #3
3. Hang in the market the entire time, and just wait for the market to start moving back up. Also BUY WHILE THE MARKET IS LOW! It’s a great buying opportunity! Risk: Low Reward: Low
• You’re not going to dramatically beat the market with this strategy unless you can really pick stocks, but you’ll at least not get eaten alive by transaction costs.

The overall point of this article is just to encourage investors to stay calm. The market downturn is definitely tough, but freaking out and completely selling everything you own is not a good idea, unless you know for a fact that you can time the market perfectly. One of the best strategies for investing is just putting money in an index fund that tracks a broad based market index, and only checking the market every few years. Stock markets will always have short term volatility, so there’s always the chance that in one year the S&P could lose 10%. But if you wait ten years, most likely you’re going to be up a significant amount… just don’t freak out about the short term fluctuations.

P.S. I am using strategy #3