Why You Shouldn’t Panic About the Drop in the Stock Market

Laura Shin
Posted

Wall StreetThe markets have been especially jittery in recent weeks—and yesterday was no exception. All the major indexes dropped 4-5%, evoking nightmares of the 2008 Lehman Brothers meltdown and the ensuing market nosedive.

It’s true that the stock selloff was sparked by bad economic news, but we still caution against converting all your investments to cash. (You’ll see why below.)

Here are some of the reasons traders shed their investments yesterday:

  • A European bank had to borrow $500 million. While this is not a huge sum, it reminded investors of 2008, when European banks were short on U.S. dollars. It could also be an omen that Europe’s debt crisis may escalate.
  • The U.S. inflation rate in July was higher than usual—if inflation kept rising at that rate, it would climb 6% in one year.
  • The number of Americans filing for unemployment rose last week.
  • U.S. manufacturing in the mid-Atlantic region plunged 31% in July, when analysts had been expecting an increase of 2%.
  • Existing home sales tumbled almost 4%, dashing hopes for a boost there.

So, yes, that all sounds bad. So bad we also want to immediately convert all our investments into gold (another thing that investors did yesterday in droves). But don’t do anything drastic just yet.

Yesterday, Fidelity released a study showing that people who bailed on stocks in 2008 during the Lehman Brothers crisis have fared worse than those who followed the standard personal finance advice to stay the course.

According to the study, those who dumped their stocks between October 2008 and March 2009 and had not reinvested by June 2011 saw their balances increase just 2%. As for those who didn’t give in to their inner panic? Their balances are up 50%.

When we look at cold, hard data like that, we remember all the mantras that have been drilled in us. These could be useful to you when you look at your fluctuating net worth in LearnVest’s My Money Center:

  • Invest for the long term.
  • If you sell, you lock in your losses—so, don’t sell! (On the other hand, if you have cash and haven’t yet invested in the market, talk to a financial advisor, because now could be a good time to buy.)
  • The worst time to make a decision is when you feel panicked.
  • Having the proper mix of investments will largely protect you from big crises.
  • And most importantly, when your investments aren’t giving you much joy, count the other blessings in your life: friends, family, health and whatever else makes you smile today.

 

  • http://twitter.com/pannepack Rachael Pannepacker

    One more mantra to add to the list: Buy low, sell high.

  • http://www.mangomoney.com Mango Money

    Hi, Laura, thanks for the post. It does seem a little bit counterintuitive to stick with it when things get so unpredictable, but you’re right, if you bail now, you’ll probably just end up worse for it. And like I said, things are “unpredictable,” but that doesn’t necessarily mean they’re bad– they’re just a little… wobbly right now :o )    

     I work for Mango Money’s blog and we recently wrote a post, which will go up this Tuesday, along the same lines. It’s about the S&P downgrade, what that really means for us. When I was researching it, I came to the same conclusion as you did with this stock market article– don’t panic! Like I said, it’ll be up on Tuesday. Swing by and check it out! http://www.mangomoney.com/blog/

  • http://senseofcents.blogspot.com/ Michelle

    Thanks for this! I agree, if you’re young, then you should especially not bail.