For investors, such stock market drops are scary.
They are also predictable.
While nobody can predict when the market will tank (or by how much), we all know that markets ebb and flow. Sometimes, they do so dramatically (especially when unexpected events occur).
But a stock market crash like we witnessed this week is only bad news if you need your money soon. This is why you shouldn’t buy stocks with money you’ll need in the next couple of years.
For all other investors, a stock market crash should be a non-issue.
In the past few years, the S&P 500 has experienced significant drops, neither of which did any lasting damage.
Over those years, however, the value of the S&P 500 has more than doubled.
That’s the good news, and also the bad.
The fact that the S&P 500 has done so well over the last several years (despite the occasional scary bump) is a reminder that stocks are still a great long-term investment. But stocks won’t climb at this rate forever.
How much a long-term stock market investor can expect to earn over 30 or 40 years is the subject of much debate.
Historically, an average annual rate of return of 10 percent (not adjusted for inflation) over 30 years is not unusual. But we shouldn’t expect that will always be the case. This article does a good job explaining why.
What should you do after a stock market crash?
For long-term investors, the best thing to do when the stock market crashes is nothing.
Take a breath, turn off the news and—whatever you do—don’t log in to view your account balances.
Resist any urge to sell stocks
Selling stocks in panic is the worst thing you could do after a stock market crash. Successful investing is about buying low and selling high. When you sell after a crash, you do just the opposite.
And if you think you can just cash out for now and then get back in when the market improves, consider this: You have no way of knowing when the market will swing back. And there is a big cost to missing just a few really good days in the stock market.
For example, if you invested $10,000 in the S&P 500 between 1993 and 2013 and left your money invested, you would end up with $58,333, a 9.2 percent annual compounded return. If you missed the 10 best days, you would end with just $29,111, a 5.49 percent return. If you missed the 20 best days, you’d have just $11,984 (a 0.91 percent return). These statics are from a 2014 Guide To Retirement by JP Morgan Asset Management.
Buy stocks (if you were going to anyway)
The best time to buy investments is when you have money to invest. The best time to sell investments is when you need money for something else.
That said, if you’ve wanted to invest but have been dragging your feet for whatever reason, you might see the stock market crash as a buying opportunity. No, you don’t know if the market is going to go back up or continue to go down. But you do know this: Stocks are about 10 percent cheaper than they were last week.
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Rebalance your portfolio after things have calmed down
Diversification is important for successful investing. Although I’m a fairly aggressive investor, bonds and real estate securities make up about 20 percent of my portfolio.
After a volatile period in the market, the value of your investments may change enough to shift your actual asset allocation away from your target. There’s no rush, but big movements in the stock market are a good reminder to give your portfolio a checkup and consider making some moves to bring your portfolio back into balance.
One resource I’m currently using for this is Wealthfront – I opened an account with Wealthfront because of some specific things they had that I really liked. First is the 529 plan – I was able to swing my 529 plan for my son over to Wealthfront super easily. I also like their cash account – where I have been keeping a bit of extra cash. On top of that, their investment platform is exactly what I need (plus they do my rebalancing for me).
Related: Personal Capital review: a powerful free app for analyzing your investments
Robo-advisors can help manage your money when the stock market is in flux
For unseasoned investors, this drop can be especially terrifying. But, it’s also not the end of the world. When you’re young, you have years to make up for stock market drops—so millennials, as a group should be the least concerned.
That being said, it’s still easy to react poorly when something this scary happens. That’s where robo-advisors come in.
Robo-advisors don’t react out of fear like we do. Through complex algorithms, they choose the best stocks and bonds for you, which can be especially helpful (and offer a lot of peace of mind) when the market is in flux and you’re panicking.
Here’s a list of our favorite robo-advisors to get you started, but let me talk about some of my absolute favorites right now for this EXACT situation.
First, Betterment is awesome. I know because I invested with them, and I feel pretty darn confident about my ability to individually pick stocks. But I just love their platform.
They’re a robo-advisor that has a ton of features (including a new cash account and automatic tax-loss harvesting) and best of all, no minimum investment. So when the market is uncertain like it is right now, you can start investing with no minimum.
The other robo I am loving right now is M1 Finance. They have a lot of flexibility if you want some more control over your portfolio, but still want the ease of using a robo-advisor.
Check out my complete M1 Finance review, but the TL;DR is that they’re affordable, super flexible, and you can invest in fractional shares.
A sudden stock market crash is unnerving, but it’s not a sign of imminent financial collapse and it doesn’t mean that stocks are no longer a good long-term investment.
Unless you need cash immediately (in which case it shouldn’t have been in the stock market in the first place), do NOT sell off your stocks after a crash. The best thing to do is nothing. However, it is OK to buy some investments if you have money to do so. After things have cooled off, take time to review your investments and make any adjustments to bring your asset allocation back into balance.
- Should You Go With A Robo-Advisor Or Build Your Own Portfolio Of Mutual Funds?
- Improve Your Investing: Robo-Advisors Are Becoming More Human
- How To Invest In The Stock Market – Our Complete Guide