Is The Stock Market Crashing?
Dan Nastou, CFA
It’s been a rocky start to the year for the stock market. The S&P 500 is down close to 10% and the tech-heavy Nasdaq is down 15%. It’s completely normal to feel anxious in times like this (and maybe start to panic a little). But panic is never the solution!
So here are a few things to help you keep perspective;
1) Predicting near-term market moves is virtually impossible
Investing in stocks is a great way to build wealth over time, but having a long enough time horizon is key. If it’s money you’ll be needing in the next 3 years or so, you probably shouldn’t have it invested in the stock market to begin with. Volatility can pick up with little notice, and the last thing you want is to become a forced seller at exactly the wrong time.
2) Corrections are an unavoidable part of the investing process
Market declines of at least 10% tend to occur every 2 years or so. Larger drawdowns are less frequent, but we’ve had four corrections of 20% or greater in the last 20ish years. And just remember, when we do have a correction, it’s obviously painful in the moment, but it also means your future investments will be made at more attractive prices, which means higher future gains.
3) The market has had an incredible run over the last few years
And it’s been aided, at least in part, by the Fed’s aggressive monetary stimulus which is scheduled to end soon. By almost any metric, broad stock market valuations are well above long-term averages. Which means it wouldn’t be all that surprising to see stocks fall further.
But trying to time when to get OUT and then when to get BACK IN is almost impossible and will likely lead to worse performance over the long run. Even professional money managers struggle to time the market correctly. Time in the market beats timing the market.
4) Psychology is a huge factor with our finances and investing
This is especially true during wild booms and busts. If you find yourself checking your portfolio every day, hour, or minute, stop! Making sudden, emotionally charged changes to your financial strategy is about the worst thing you can do. Take a breath, unplug, and re-evaluate if you need to. But don’t make a rash decision out of panic. Tomorrow is another day.
Takeaway: If you have a good plan in place, you take advantage of diversified, low-cost index funds, and you keep a long-term mindset, you should be well positioned to weather the storm.
As always, this is education, not financial advice. Talk to your financial professional if you need help or are thinking about making changes to your investments.
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