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

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

The 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.

 

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