Stock market crashes are inevitable. And should be expected.
Ironically, the fear caused by a crash does far more harm to portfolios than the actual magnitude of the crash. And perfectly rational investors are overwhelmed with terrifying headlines and doomsday predictions. The instinct to either sell, or stop investing, is always a mistake.
Not surprisingly, in a move to placate investors, Apple chief executive Tim Cook dashed an email to Jim Cramer, the host of CNBC’s Mad Money show. His message stated that Apple continued to experience strong business growth in China through July and August; growth in iPhone activations has accelerated over the past few weeks; and China represents unprecedented opportunity over the long term.
Here are three things to keep in mind with regards to the stock market upheaval.
Understand that volatility comes with the territory.
Remember, most people, even those in retirement, need the long-term earning potential of stocks to ensure they meet their financial objectives. Yes, it's sometimes painful to hold stocks in the short run, but that's the price you pay for the long-run higher returns a well-diversified stock portfolio can offer. If you've determined you need stocks for your long-term plan, a short-term market correction shouldn't change that need.
The stock market often makes very dramatic moves in a short period of time, and extreme volatility like Monday’s occasionally occurs. Don’t sweat it. Think about your long-term plan and what kind of assets you need to get there. Think about how the market has been through this before, many times and much worse. Remember that these bouts of stress are why stocks return more than other assets to begin with. If stocks were steady-eddy, up-and-to-the-right all the time, they would not have the return potential they do. And your long-term portfolio would suffer because of it.
Keep the long-term perspective in mind.
Although such times in the market make us feel like we need to do something, reacting out of panic is rarely a good strategy. Don’t blindly sell stocks because they are suffering right now. And if you think you can sell stocks now and buy them back later at the bottom, think again. How many times after 2008 did it look like the market was ready to roll over again? No magic bell will ring when stocks are ready to start climbing again. In the meantime, investors who are stuck sitting on the sidelines can end up missing the bulk of a recovery--and hence, a major component of stocks' longer-term returns.
Think about any tangible asset that you hold: a house or a piece of fine art. You wouldn't sell it if the buyer wasn't offering you a fair price. It should be the same with your equity holdings. If you don't need the cash today, why would you sell when they are distressed? If you need to sell for a critical need, then you need to sell. But if you don't need to sell, don't turn paper losses into real ones.
Don’t let the news control you.
Generally, most people days don't pay too much attention to the stock market or spend much time thinking about it. But then you have exceptions when the market crashes dramatically and all hell is let lose (apparently). That is the time investors need to stay guarded against impulse.
Every stock market investor would have endured many crashes in the past and will continue to face them in the future. The trick is to ride them.
Tim McCarthy in a column in Forbes a year ago suggested that investors stick to “trickle investing”. Investing a little into the market periodically and consistently will go a long way in building wealth. In other words, systematic investing or what we refer to as a systematic investment plan, or SIP, into an equity mutual fund. Stick with your plan to take the sting out of market crashes. You will eventually be rewarded for stomaching the inevitable volatility.
