The Smart Investor Doesn't Panic When Stock Market Drops

This week's stock market drop spooked many investors. However, smart investors know a volatile market is no time to panic.

The stock market is recently more volatile than usual and trending downward. This produces uncertainty which in turn makes investors feel uncomfortable. Since investor choices are more important than usual at this time, as much objectivity as possible is needed.

Below are some of my own thoughts in this regard.

Lucien Freud "Girl with a Kitten." 1947. Tate Modern. Photo by the author. As the stock market drops, many investors feel a tight grip of suffocation. This can lead them to make market decisions that they regret later (such as a major selling spree).

Yesterday

On Wednesday, the market was in a slide and ended 163 points lower than it started the day. That is almost 1%. It sounds scary.

The reality, however, is less jolting in my opinion. The Dow was down only 5.6% for the year at the end of the day (the 52 week high was 18, 351 and its low was 15,855) which suggests the 1% drop was adding to a correction more than anything else. Of greater concern would be a 10% or 15%, dive which would bring the market to 16,515 and 15,598 respectively. Even that could be turned into an opportunity.

Today

Oil is near $40 per barrel and futures are significantly down as of 8:16 a.m. today (Aug. 20). There may be a sell-off further accentuating any earlier distress. If the market does plunge, entering it at the 16,515 level or below might be reasonable for those with sufficient cash reserves.

Tomorrow

There will be two lines of prediction, negative and positive. Either, of course, could be correct, since no one can pre-determine the future. The media tends to weigh in toward the former because it is attention getting and buys air or print time. This makes the news about the stock market theatrical and promotes selling stock.

A more level-headed approach from my point of view is positivity. There are buoyant signs afloat. China appears to be taking the needed steps to halt its market fiasco. The US Fed has flexibility on its interest rate options. Germany has reached a bailout agreement with Greece, etc., etc. So, staying in the market and even buying at this time might be the best approach. Perhaps FDR was right when he said, “All we have to fear is fear itself.”

For More:

Using Fear to Your Advantage

Too Much Cash: Another Look—Retirees Listen Up

Worst Case Scenario

Imaginary Control and Financial Decisions