(Full disclosure, I planned way too ahead in my posts when I was starting this blog, so this post is obviously very dated. Oops.)
If any of you had been paying attention earlier this year, you would have seen the Dow dropped 666 points on Friday, February 2nd, 2018. A lot of people were concerned it was the beginning of a correction or even worse, a recession. Personally, I thought it was a bad omen the reincarnation of the devil himself, Tom Brady, was gonna win the MVP of the Big Game. Apparently, it was because of some unrelated football stuff instead. Go figure.
And then to top it all off, the Dow had its largest one day drop in history today, February 5th, 2018! It dropped a whopping 1175.21 points. That's 4.6% of the entire index, just from one day. The S&P 500 index also dropped 4.1% for today.
As a Giants fan, if you ask me, it's because the Eagles won. I mean, just look at this. If you didn't know the result of the game or didn't even know there was even a game going on, you'd think it was the end of the world. I saw a video of a guy eat horse manure but then proceeded to get pissed when he let his scarf fall on it. I'm so bothered by this day, but I digress.
Contrary to popular belief, others are saying that's not why the market dropped so much this past couple of days. There are concerns that central banks will increase interest rates in response to inflationary pressures from rising global economies. And when interest rates rise, stocks go down. But that's for another post to get into.
There is also speculation there were algorithms set to sell at a specific amount. Apparently, traders reported computer programs triggered trades to occur when the S&P 500 reached below 24,000 and the Dow below 25,000 and 24,000. That's what I read, but I have been hearing this across the board, so it might very well be true. I don't know much about the computer programming side of buying and selling stocks, nor do I care to.
More factors related to the recent decline:
- Due to accelerating wage growth, an anticipation for rising inflation
- Overall investor attitude has become attracted to stocks, becoming a contrarian risk factor for the market
- Interest rates rising (10-year U.S. Treasury yield rose above 2.8%)
- General belief the Federal Reserve will raise short-term interest rates more than 3 times this year
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So what do you do when the market drops like this?
Really, nothing out of the ordinary. Just keep a cool head. When drops like this happen, just think to yourself, “what else am I gonna do anyway?” Because at the end of the day, it's true. Why would you take your money out of the market when this happens? If anything, it's a buying opportunity even if it's only been a couple of days.
Sure, this could be the beginning of a recession that lasts a couple of years. After all, an average bull market lasts 9 years, while the average bear market lasts 1.4 years. But as history shows, when everyone is pretty much in agreement with the overall direction of the market, it's probably gonna go the opposite direction. And who knows, maybe the next day will gain 5% and you chose to miss out. That would really suck.
The only thing you should be doing is taking advantage of the opportunity. If you think the market is going to keep going down, fine. Just put in a fraction of the total you're willing to invest if you have cash on hand. That way, in case you're wrong, you can take solace in knowing you at least invested something before the market went up again. And if the market keeps going down, great, keep allocating a certain amount every week, two weeks or whatever you want to do, so you can take advantage of the discounted prices in stocks.
And keep in mind this won't be a one-day event. The market will bounce up and down for days, even months before you really see the general direction it's taking. There's no need to feel rushed or panicked.
But whatever you do, don't be afraid to invest your money in the stock market. Over the long run, even bear markets don't make a difference if you keep your money in the game long enough.
Look at this:
You can't even notice the recent price declines in the grand scheme of things. When you look at the bigger picture, it makes no difference. The market has much less to do about money than it does psychology. Don't be intimidated because the market dropped over 4% today. Get excited about the opportunities this can present you. Everyone says buy low and sell high. Hardly anyone does it. That's why there are huge sell-offs and they continue to go even further sometimes because investors get spooked.
Don't be like them. What I plan on doing tomorrow is investing a tiny bit of what I have available in cash. I'm going to put this in my S&P 500 Index funds. If the market turns and continues to go up, great I got in at a lower price. If it goes down, great I can buy more.
Remember, as of right now the P/E ratio is 24.74. The average is 15.69. The market is still expensive compared to the average. Nobody knows when the market will go up or down.
Your best bet and my best bet is to patiently invest small portions relative to the amount of total cash we have on the side to invest. This way, we won't be kicking ourselves if the market gets cheaper. If it does, invest more. If it doesn't, be patient and wait for the market to get cheaper. But right now if I were you, I would highly advise you to invest a portion of your cash in an index fund. Keep watching the market and beware of more buying opportunities. This might not be the last time in the near future you see a dip like this. Get yourself in the psychological habit of getting excited when the market goes down, rather than panicking. Then you'll be able to really invest well.
It's human nature to be defensive and feel threatened when you look at a single day drop like the one we just experienced. Through a one-day window, it looks terrible. But when that happens, just remember these are the times to get greedy. Don't sell anything. This is what could happen to you if you sell and miss out on some of the best performing single days over the course of 45 years:
What do you think of the market drop? Are you going to take advantage and invest more?
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