The stock market has fallen sharply in recent days, causing many investors to panic about their portfolios.
The Nasdaq (NASDAQINDEX: ^IXIC) is officially in correction territory after a drop of more than 11% since mid-July, while the S&P 500 (SNP INDEX: ^GSPC) And Dow Jones (DJINDEXES: ^DJI) have fallen by about 7% and 4% respectively in that time. With prices continuing to fall every day, it is normal to worry about where the market is headed.
In times like these, your strategy is crucial. Even seemingly small mistakes can cost you a lot of money during periods of volatility, but there is one simple move that can protect your investments: do nothing.
The power of nothing
When the market is in disarray and investors are panicking, it is human nature to want to trade something to protect your savings. After all, when the market itself is outside your control, it can be tempting to try to manage factors within your control.
Most of the time, however, it’s best to just wait and see, regardless of any volatility that may arise.
The market is incredibly unpredictable in the short term, and even experts can’t predict how long this downturn will last or how far stock prices will fall. If you sell your investments now and the market immediately rebounds, you’ll miss out on that profit. And if you reinvest after the market has risen, you’ll end up paying higher prices for the same stocks you just sold.
Timing the market is essentially a gambling game, and getting it wrong can be costly. For example, suppose you decided to sell your stocks on March 9, 2020, about a week after the market began crashing due to fears about the COVID-19 pandemic.
At the time, it may have seemed like you had protected yourself from big losses. The S&P 500 had already fallen more than 18% since the decline began on February 20, but the index had much further to fall before bottoming out in late March.
But by year’s end, the S&P 500 had risen nearly 37% since March. The tech-heavy Nasdaq had done even better, up more than 62% in that time. If you’d sold your investments, you’d likely have missed out on some serious gains.
Of course, no two recessions are the same, so it’s impossible to say whether the market will perform in a similar way now. There’s always a chance that this downturn will last much longer. But again, if you risk your investments and bet wrong, it could cost you thousands of dollars.
A safer approach
Rather than focusing on what the market will do today, tomorrow, or even next week, it is safer to focus on how the market will behave in the coming years and decades.
The market has proven to be incredibly resilient, even after being battered time and time again by some of the most brutal bear markets, crashes, and recessions in history. The market has recovered from every single downturn so far, and there is no reason to believe that this streak won’t continue given enough time.
What’s the best thing to do right now? Keep your money in the market and just wait for the inevitable recovery. If prices continue to fall, your portfolio could lose value in the short term. But if you weather the storm and hold on to your investments, you’ll likely see significant gains once the market rebounds.
These have been tough days for many investors, but this volatility — like all market turbulence — is only temporary. By investing in stocks for the long term and staying in the market through good times and bad, you will reap the rewards during the recovery phase.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Stock Market Sell-Off: Here’s the Best Investment Move You Can Make Right Now was originally published by The Motley Fool
