2018 Update: We still stand by this advice on how to react to a stock market drop, but you may also want to check out our recent discussion about whether you invest in stocks or index funds.
Do you know what to do with your investments when the stock market takes a dive — how to react to a stock market drop? Were you worried about what would happen with the markets today? Late last night, as Donald Trump was getting close to winning the presidential election, the headlines began to announce dire predictions: “Trump’s win turns stock market into shock market,” from CBS News. “Be very scared for your 401(k) right now,” from Mother Jones. “Stock Futures Plunge as Donald Trump Posts Surprising Win,” from the Wall Street Journal.
Not everything about such a situation is bad, as Shannon McLay, founder and president of The Financial Gym, told us this morning before the markets opened:
I think that today will be a gift to investors as the stock market will likely drop on the uncertainty of a Trump presidency, but what that means for investors is that they have the opportunity to buy stocks, ETF’s, mutual funds, etc., on sale. Who doesn’t love a sale? If you have cash in your investment accounts, you should consider investing in the uncertainty, especially if you are investing for the long run.
Now that it’s late morning, we know that things aren’t as bad as expected. Under the headline, “Markets meltdown fails to materialise,” the BBC reported,”The S&P 500, Dow Jones, and Nasdaq stock indexes were little changed after the first hour of trading.” The Chicago Tribune reported that the “conciliatory comments” in Trump’s victory speech “helped global stock markets recover a large chunk of their earlier losses Wednesday.”
If there had been a big drop in the stock market, what would you have done? Do you know what the best things to do are? These are some of the experts’ tips:
- Unless you’re about to retire, try to take the long view. Don’t, for example, keep logging in to check your accounts every day! According to Fidelity, “Over the past 35 years, the market has experienced an average drop of 14% from high to low during each year but still had a positive annual return more than 80% of the time.”
- Keep contributing to your retirement accounts — especially if your employer does a 401k match.
- Assess your tolerance for risk. This investment-risk tolerance quiz, created by two personal finance professors, can help.
- Talk to a professional. Get some advice from a professional — here’s our advice for finding a financial planner.
When the stock market drops, what is your strategy? In general, how much risk are you willing to take on in your portfolio? If you were watching election coverage late last night, were you worrying about the market predictions?
- Advice After Stock Market Drop: Take Some Deep Breaths, and Don’t Do a Thing [New York Times]
- Why a Stock Market Crash Can Be a Wonderful Thing [Motley Fool]
- Six strategies for volatile markets [Fidelity]
- What to Do After a Market Drop [Betterment]
I am having an incredibly difficult time working today. A few fellow associates have teared up with me in our offices as we process what happened.
For more senior folks, how do handle your emotions at something so very serious when you’re on the job? I feel bad that I’m not being a good advocate today, but at the same time, I don’t feel well.
I’m grateful that I’m not retiring for at least 25 years.
I’m going to just continue contributing to my 401k as I have been and just not looking at it. Staying the course.
Unfortunateley, I think I may also have to work for another 25 year’s, which would take me to age 60 or so. FOOEY! I want to get MARRIED now and retire. Why can’t I find a man to marry me. I would even marry a Trump in law, such as Jared Kushner, but he already has IVANKA! FOOEY!
Set it and forget it. Asset allocation matters.
I’m planning a career change involving going back to school in January. I have enough funds in money market and bonds to get me through my education without taking student loans. If it gets really bad, I’ll pull student loans to make my savings last so I don’t have to sell at a major loss.
The Dow is up 200+ points right now. I think we’ll see lots of volatility in the next 6-12 months. But then, the last 18 months have been nothing but volatile. I think the US stock market has been so lackluster partly because of the uncertainty the election brought and because it was anticipating a Trump win.
Overall, I see no assets with a reliable 4% return. US stocks/currency/bonds were a safe haven when the EU imploded. There are even negative interest rates in Europe and Japan! There is a ton of cash that has to be invested somewhere and the US, even with Trump, is still one of the more stable places to park money.