It's been a turbulent time for the financial markets, to put it mildly. The S&P 500 (^GSPC 1.81%) fell by more than 10% over a two-day stretch and is officially in bear market territory, as of this writing. Most other major indexes are also down sharply from their recent highs.
Times like these can be frightening, especially if you're a relatively new investor. But it's important to realize that market corrections, bear markets, and even stock market crashes are a normal part of long-term investing and can be expected to happen occasionally.
A market correction, defined as a drop of 10% or more from previous highs, happens about once a year historically. Bear markets, which are typically defined as a 20% drop, have occurred every five years or so, and it isn't unheard of for the S&P 500 to fall significantly more than that. In the 2007-2009 Great Recession, for example, the S&P 500 fell by well over 50% before it finally bottomed out.
While market corrections and crashes are a normal part of investing, how you handle them can have a massive impact on your long-term results. With that in mind, here are three smart moves you can make during a stock market downturn like this, and one mistake that's incredibly important to avoid.
Image source: Getty Images.
In no particular order, here are some things you might consider doing in the turbulent stock market environment:
1. Do nothing at all
One of my favorite things to say to myself, as well as to clients, when the market gets extremely turbulent (like it did the two days after the tariff announcement) is, "Today is a great day to do nothing." Unless I need to see the news for writing purposes, I'll often turn it off when the market is really volatile.
Even if I see a stock I want to buy trading for a relatively cheap price, I'll often wait and let the dust settle before doing anything. The way I think about it is either the market will quickly rebound and I'll miss out (but the rest of my portfolio will go back up), or things will fall even further and I'll get a better opportunity.
The tariff situation is a great example of this. The S&P 500 fell by about 5% the day after the announcement, but if you had waited a couple more days, you could have capitalized on another 7% downside.
2. Look for bargains
While it's perfectly fine to do nothing at all in a market downturn, it can also be a good idea to start looking for places to put money to work. That's especially true when the market has already fallen into bear market territory, like now.
To be clear, I'm not talking about timing the market. It's entirely possible the S&P 500 could fall another 10% or even more if the trade war intensifies or causes a spike in inflation.
However, the point is that if you're a long-term investor, a drop of 20% or more from the highs has historically been a great time to put money to work. For example, if you had bought a simple S&P 500 index fund when it first fell by 20% in the 2022 bear market, you would be sitting on a 39% gain today, even after the recent market crash.
Here's a more historical example. Say that you invested in the S&P 500 when the market first fell by 20% in the 2008 financial crisis. Even though you would have been "early" and there was another 30% downside to come, you would have had a 450% total return in the roughly 17 years since.
3. Make some contributions
On a similar note, a bear market can be a great time to boost your contributions to retirement accounts and college savings accounts. As a personal example, I have an auto-drafted contribution going into both of my kids' 529 savings plans once a month, but I recently decided to make an extra contribution to take advantage of the decline, since my oldest child is still about nine years away from college and there's plenty of time to ride out the ups and downs.
1 Big mistake to avoid
You don't necessarily need to increase your retirement contributions or put cash to work in a down market if you're uncomfortable doing so. Simply staying the course with your investments, no matter what the market is doing, is a time-tested long-term strategy.
Just as important as what you do during a bear market is what you don't do. The No. 1 mistake people make in downturns and crashes is to panic and sell. And I get it. When stocks start to fall, it's human nature to want to sell "before things get any worse." And when stocks go up, that's when our instincts tell us to put our money in.
It's common knowledge that the central goal of investing is to buy low and sell high, but our natural instincts tell us to do the exact opposite. If there was a No. 1 move to keep in your bear market playbook, it would be to hold on to good companies in your portfolio for as long as they remain good companies. In other words, unless something significant has happened to the business itself (not just to the stock price), selling into a down market is usually a bad idea.
