3 Things to Do When the Stock Market Drops

February 5, 2016

Stock Market Drop

The stock market started 2016 on shaky ground, with many indices getting close to (or below) 52-week lows. Regardless of whether you’re an active or passive investor, chances are the fluctuations of the market have affected your investment accounts in some capacity — and they’ve almost certainly impacted your emotions.

Many investors get unnecessarily panicked when the stock market drops, but you don’t need to worry if you maintain a smart and simple financial plan. When the stock market drops, don’t get irrational and let your emotions make financial decisions!

Here’s what you can do instead.

Review Your Comprehensive Plan

Everyone should have a long-term financial plan in place that acts as a roadmap to move you closer toward reaching your financial goals. This will help keep you on track, even when you’re a long way out from achieving what you want.

It’s not uncommon for the market to experience wild swings in both directions on a day-to-day basis. But considering that reaching financial success requires a long-term strategy, there’s no reason that market volatility should derail the plans for your financial future.

Periodically take a look at your financial plan to gauge where you are, and make adjustments as necessary. Keep in mind that even the most sound financial strategies will require tweaking, and in some cases, complete changes.

Just don’t let fear guide your decisions. Remember that a little turbulence in the market today probably won’t make a lick of difference in the long run, especially when you’re younger and investing for a time in the future that is 20, 30, or even 40 years away.

If you don’t have a comprehensive financial plan that you can review and remind yourself that you are prepared to weather any storms, it’s time to work with a financial pro to establish a plan.

Be Like Buffett

If you have some cash available, consider following Warren Buffett’s advice to be “greedy when others are fearful.”

At the core of Buffet’s message is the idea that you don’t get rich buying when the market is high or selling when the market begins to decline. You can, however, take advantage of lower priced assets when the stock market drops — a time when uncertainty resigns many investors to the sidelines.

A drop in the stock market is like items at a store being sold at a discounted rate: prices are lower, so buying in now means you have an opportunity to invest before prices inevitably rise again. A further glimpse into this theory reveals that when a stock’s price falls, an investor who purchases the stock can only lose the amount they contributed to the purchase, while the potential gains are limitless.

It is for this reason that many investors view a falling market as the ideal chance to pick up investments at bargain prices rather than a time to retreat into a more passive approach. This strategy is sometimes known as timing the market.

So while a stock market drop is an opportunity to be like Buffett, don’t get carried away! Keep in mind that trying to time the market is difficult even for experienced investors and is a strategy that should not be used without thought or guidance.

If You Have Questions, Ask

It’s hard to check your emotions when you are primarily focused on the ebb and flow of your net worth. Financial advisors exist to alleviate some of that anxiety and help keep your finances on a rational path.

An advisor can explain how to appropriately identify and take advantage of market opportunities while avoiding the dangers of market timing. A good financial planner should be one of your key allies in staying on track with your long-term financial strategy.

Lean on them to answer any questions about the market in general and rely on their expertise to help you craft a specific plan to minimize the anxiety related to your portfolio, regardless of what’s happening in the broader financial markets.

The key takeaway in all of this is to take action before a huge shift in the stock market, not after. Don’t let short-term situations cause you to panic and make emotional decisions that will negatively impact your long-term success.

If history is any indication, market fluctuations are inevitable — and often unpredictable. But with prior planning and the support of a knowledgeable financial planner, you won’t be swayed by the volatility of the market.

Instead, you’ll find this to be a prime opportunity to increase your investment portfolio and position yourself for future financial success.

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