Monday's marketwide sell-off wasn't just an off-day for stocks. It was the worst single day for the S&P 500 (SNPINDEX:^GSPC) in weeks, and the biggest daily loss for the Dow Jones Industrial Average (DJINDICES:^DJI) since October.
The stumble stopped in the following days, as markets clawed back their losses. Nevertheless, the sheer scope of the pullback is a clear reminder that the market can have big declines. And given the incredible 80% gain the S&P 500 logged between last March's low and this month's high, a future crash could be a lot bigger than the 2% to 3% drop we saw Monday.
With that as the backdrop, here are five moves to make should the bears growl again, listed in order of importance. The next market stumble may not be as easy to end as the first one was, so you'll want to be ready.
Image source: Getty Images.
1. Breathe
It's admittedly easier to say it now than it is to do in the midst of a marketwide meltdown, but don't get too worked up over a big sell-off. Some of the financial media benefits by embellishing pullbacks and inducing a full-blown panic, but it's not as if we've not seen and survived plunges before. This one will be no different. Most of your portfolio's value will remain intact, provided you're holding quality names and you're well allocated. Hysterical thinking never leads to good decision-making.
So, before anything else, take a couple of deep breaths. It's just temporary weakness.
2. Shed your shakiest holdings
Assuming you've successfully calmed your nerves with a few deep breaths, now let's get serious about pruning your picks. Certainly some of them are keepers regardless of the environment -- mainstays like Microsoft (NASDAQ:MSFT) and Walmart (NYSE:WMT). If you're like most investors, though, you may have also picked up some more speculative picks like GameStop (NYSE:GME). A sweeping sell-off will put pressure on nearly all stocks regardless of their caliber. A major pullback, however, can really upend names that are of lesser quality. The trick is being honest with yourself about why you own each stock you own.
3. Dust off your watch list and make an entry plan
It's seemingly two different steps, but it's really just one.
Any single-day plummet that kicks off a more prolonged sell-off is ultimately a buying opportunity, but you don't necessarily want to start your search during the plunge's most harrowing days. You should always keep a list of prospective buys handy if and when their prices turn attractive enough, but that price should be pre-determined before the pullback plays out. Sure, you may not be stepping in at the stock's exact bottom, but as the saying goes, don't be penny wise and pound foolish.
4. Forget about trying to spot the exact bottom
And that idea can't be stressed enough. Holding out for just a few dollars upon entry may cost you much, much more when all is said and done. You should expect to pay for quality, and it's better to pay a little more than you might like than it is to miss out on an opportunity altogether.
The same goes for timing the market's exact bottoms (and for that matter, its exact peaks). Some folks are lucky enough to do it on occasion, but nobody does it consistently. In fact, trying to do so typically ends up doing more harm than good, as opposed to sticking with a simple plan of holding quality stocks for the long haul, including through the tough times.
5. Focus on the long run
If your gut tells you a big one-day plummet doesn't really matter even if it's an omen of a major correction, trust your gut because it's probably right -- a year from now any pullback won't really matter.
This is going to be tough for some investors to believe, but the uninterrupted bullishness since last March isn't the market's norm. Setbacks and even full-blown corrections are actually pretty common. Between 2000 and 2019, the S&P 500 logged pullbacks of 10% or more 11 different times, according to data from broker Charles Schwab, and fell nearly 10% another two times. Yet the index still logged net gains in 15 of those 20 years, and produced an average annual gain of 6% during that 20-year timeframe.
Point being, a sharp sell-off really is something a true buy-and-hold investor can ignore.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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