StashLearn
Financial education, no lectures.
Ask
Get the app

Join millions of investors on Stash

Investing, simplified

Start today with as little as $5
Get the app
Money News

The Market Dropped. Now What Do I Do?

February 06, 2018

  • Markets are down, but they’re not in correction territory yet
  • Consider diversifying your portfolio with a mixture of stocks, bonds, and commodities
  • Think about adding more bonds to your portfolio
3 min read

If you’re like a lot of investors, sitting on the sidelines and watching the recent market drop was probably a little scary.

On Monday, the Dow Jones Industrial Average had its biggest single-day point decrease in the history of the index. It plunged nearly 1,200 points, wiping out hundreds of trillions of dollars of gains across the board.

But perspective is always important.

In context of other big stock sell-offs, yesterday’s drop wasn’t as significant as, say, the beginning of the financial crisis in 2008, when markets shed about half of their value, losing some $30 trillion of wealth.

Fact: The market goes up and down

As stock returns have headed steadily upwards for the past few years, it’s easy to forget something important: The market is normally volatile, which means it’s subject to swings, and there will be good years as well as bad years.

In fact in the course of most years, it’s normal for markets to experience something called a correction, defined as a market drop of 10% or more, according to some experts.

Investing, simplified

Start today with as little as $5

Get the App

Is this a correction?

We weren’t in correction territory as of close of markets Monday, February 5–indexes including the Dow fell 4.6%, and the Nasdaq and S&P 500 fell about 4%.

As indexes continue to seesaw, however, it’s important to remember that when you’re invested for the long haul, your going to see markets go up and down. Over time, it’s reasonable to assume your portfolio could increase at about 5% annually*, according to some experts.

“What Americans are witnessing now is…a return to normal market behavior, which has never followed a straight line,” Ruchir Sharma,the chief global strategist at Morgan Stanley Investment Management, wrote in the New York Times on Tuesday.

So if you’re invested in the market currently, consider staying the course.

Here are some tactics to think about

Diversify

It’s never smart to put all your eggs in one basket. It’s a good idea to consider investing in a mixture of bonds, stocks, sectors, industries, and geographies. Maybe you have too much in technology-focused funds, or blue chips, or small cap companies. The world’s a big place, and there are ten economic sectors to consider. You can invest in clean tech, cybersecuirty, and healthcare, to name a few other options. You can also invest internationally, in emerging markets, Asia, and Europe.

Consider putting money in bonds.

As the stock market has scaled ever higher heights in the past year, it’s likely your portfolio may be over-allocated toward stocks, because that’s where the big returns have been. Bonds, which are essentially IOUs from the federal and local governments, as well as companies, are generally considered safer investments. Since the financial crisis, bond returns have been pretty muted, at about 2%. But with short-term interest rates going up, the interest rate on longer-term bonds appears to be increasing too. The yield on 10-year Treasuries, for example, has risen about 0.5% over the past year to about 2.85%.

It’s normal for markets to experience something called a correction, defined as a market drop of 10% or more.

Think about commodities.

These are hard assets including metals (think gold, silver and nickel), grains, livestock, and foods. Commodities can act as hedge against inflation, according to some experts, since they tend to increase in value as inflation rises.

Inflation can have a negative impact on stocks. And as we wrote recently, fears about inflation have sparked some of the current market turmoil.

Don’t panic, you’re an investor

It’s important to keep in mind that there is no way to eliminate uncertainty from investing completely. But with some planning, it’s possible to minimize the risks you face in the market.

 

*Example is a hypothetical illustration of mathematical principles, and is not a prediction or projection of performance of an investment or investment strategy

By Jeremy Quittner
Jeremy Quittner is the financial writer for Stash.

Next for you
Volatility: Why Is The Market So Unpredictable?
Explore more articlesChoose a topic to learn more about
pop culture politics love and money money lessons social media
Disclaimers

This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stash assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented.

Past performance does not guarantee future results. There is a potential for loss as well as gain in investing. Stash does not represent in any manner that the circumstances described herein will result in any particular outcome. While the data and analysis Stash uses from third party sources is believed to be reliable, Stash does not guarantee the accuracy of such information. Nothing in this article should be considered as a solicitation or offer, or recommendation, to buy or sell any particular security or investment product or to engage in any investment strategy. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. For more information please visit www.stashinvest.com/disclosures.