Oh No! The Stock Market Dropped!

We all have heard the news the past few weeks about the huge drops the US stock market has recorded. I have seen a ton of questions from people online about whether they should sell, buy, or panic and start stuffing cash under their mattress. Well, today we are going to talk about what you should do when you hear that the stock market dropped. 

The news and social media love to sensationalize the stock market and report on all of its daily volatility. Much of that volatility is normal ups and downs as institutional investors trade large volumes and company news causes buying and selling streaks. Many people tune out this volatility, but when the stock market takes a multi-day plunge, people tend to worry. 

So, if you are seeing a huge drop over multiple days, what are you supposed to do with your investments? All of a sudden your investment or retirement account has a lower first digit than it did yesterday. That can be a scary sight for many. If you are in this situation, here are some things to do when you hear that the stock market dropped. 

If a significant drop in the stock market is causing a significant increase in stress and anxiety, use some of these self-care tips to help calm your central nervous system in this period of stress.

Don’t react immediately

This is probably the hardest one, but it is the most important. Don’t immediately react and panic about this. Take a few minutes to learn about how much the stock market fell and the cause of this drop. 

There is nothing you can do about the stock market dropping immediately. Selling stocks takes time for the brokerage company to process the sale. Who knows what the stock price will be by the time your trade executes. Selling also may have some significant tax consequences that may be painful when you file taxes next year. 

So, take a deep breath. Find something else in the news to focus on, turn off the news, or distract yourself.  Don’t dwell or fixate on the stock market activity. It will be ok.

Remind yourself that the stock market is for long-term investments

Because the stock market is so volatile, it is not a good place to have money that you need to use in the next 5 years. Short-term (less than 5 years) investments should be in a less volatile investment vehicle like bonds or a High Yield Savings Account. 

It is still painful to see the balance decrease, but it is comforting to know that you don’t need this money for any spending for more than 5 years. And for many of us who are saving for retirement, we will not need this money for 30+ years. Your account has the luxury of time to recover from this drop. 

PSA: If you do have the money you need to spend in the next 5 years invested in the stock market (like a house downpayment fund or you are close to retirement), take a really close look at your risk tolerance and if you can still meet your goals despite the stock market possibly dropping as you reach the time you are planning to spend this money. 

Learn about what caused the stock market to drop

The main influencer of stock market drops is uncertainty. If you look back over the past 30 years at some of the largest single-day stock market drops, you can usually tie the drop to a newsworthy activity that has a level of uncertainty to it. This often shows up in events like wars, medical pandemics, catastrophic news that affect an entire industry like banking.  

Take some time to look at trusted news sites or social media influencers and see what they are saying about the “why” behind the stock market dropping. Do your own research into what the uncertainty is and how it may affect you, your life, and the people of the world. 

Understanding the cause and effects behind the drop may help remove some of the uncertainty and fear. 

Remind yourself of the facts

When the stock market dropped, the share price of individual stocks, index funds, and mutual funds decreased. The decrease in individual share price looks like you can buy one share of Tesla, Inc for $750 today, where it cost $800 yesterday. This means that the value of the stock decreased, and your portfolio decreased. 

Do you know what didn’t decrease? The number of shares of stock you own. Even if they are worth less than the day before, you still own the same # of shares and the same % of the company as you did yesterday. 

In this example, you had 100 shares of Tesla, that were worth $80,000 yesterday, but today they are only worth $75,000. You still own the exact same 100 shares. So when the stock market goes back up, your account will recover from the low value. 

Based on history, the stock market will recover. This post from Zach at Four Pillar Finance gives a great overview of the recovery of the stock market after historical drops. It takes time, but the overall market will recover. (This looks at overall market trends, not individual stocks).  

Ensure that you are comfortable with your risk tolerance level

We have talked about risk in the past, and one of the fundamental rules about investing in the stock market is that you can’t invest the money you need soon. 

The stock market is not the place for your emergency fund savings account, house down payment fund, or vacation fund. Money in the stock market needs to have time to grow and recover from any downturns so you are not forced to sell your investments at a loss.  

If you are panicking because you are house shopping and your downpayment is invested in the stock market, which is down 25%, you need to make some changes to your risk tolerance. Take some time to make a plan and see if the stock market will bounce back then get any money you need access to in the next 3-5 years out of the stock market and in a less volatile investment like a High Yield Savings Account. 

Consider investing in the stock market if you have excess cash

Like I showed in the Tesla stock example earlier, the same share of stock costs less today than it did yesterday. As long as you still believe that Tesla is still a valuable company, this decrease is essentially a discount or sale on the stock. 

I know you are a fan of buying things at a discount, so take the opportunity to contribute a little extra to your retirement or brokerage account on days when the stock market is down. 

A friend of mine uses this strategy to her advantage, any day the stock market closes 5% down from the previous day, she contributes $100 to her IRA. She might be on to something! It is her mental game that she plays with herself to make investing in her IRA fun for her. Contributing a little something extra when the stock market is down, turns a negative event into a positive action that is helping her grow her wealth. 

Drops in the stock market can be concerning for everyone. Many of us have a significant part of our wealth that is affected, and no one likes losing money! Panicking and selling immediately usually doesn’t end up working out well in hindsight. The stock market eventually recovers, it just may take some time and stretch your patience. 

How do you feel when you see that the stock market dropped? Do you have a coping mechanism or reminder that I didn’t mention here? If so, I would love to hear about it in the comments below or over on our Instagram so we can learn from each other!