After years of relatively smooth sailing, the U.S. stock market has hit two patches of rough water this year.
This month, the S&P 500 tumbled nearly 7% in a six-day span. That follows a nine-day selloff earlier this year when the S&P 500 fell more than 10% — what’s known as a market correction — in late January and early February. While this year’s market slumps have been the biggest in years, it’s important to put them in context. Even after the most-recent decline, the U.S. stock market still is up about 2% this year.
That may be of little comfort as the value of your portfolio swings wildly, but should the market plummet even more dramatically at some point, this latest dip will serve as a trial run. (First time going through this type of turmoil? What you need to know about a market crash.)
The good news is, the stock market is resilient, so you’ll make it through this sell-off — and future ones — with a little patience. Here are three ways to cope with those times.
1. Stay calm — this is normal
No pussyfooting around here: Sell-offs are painful. In a matter of days — or hours — your portfolio’s value tumbles, wiping out hard-won gains. They’re also pretty common. Pullbacks of 5% to 10% have happened three to four times a year since 1950, according to data compiled by LPL Financial.
Painful as the prospect is, fretting about a market crash can lead you to invest too conservatively, and outright panic could put you at risk of making disastrous, emotional investing decisions. And it’s best to avoid the inevitable debate raised when sell-offs do occur: Is the slump a harbinger of more drastic declines?
Fretting about a market crash can lead you to invest too conservatively, and outright panic could put you at risk of making disastrous, emotional investing decisions.
You may need to redefine what’s normal. In the most recent sell-off, the highest-flying stocks that previously pushed the market higher (Amazon, for example, was up more than 70% year-to-date at one point) now are dragging it lower. Similarly, many professional investors saw the wintertime sell-off as long overdue after an unusually steep rise in stock prices in January — in which the S&P 500 rose more than 7% in less than four weeks.
2. Stay invested
If the stock market’s latest slump has you feeling sick to your stomach, take a deep breath. These declines feel more severe because it’s been a long time since the market experienced this type of volatility. This week’s 3% one-day decline was the third such this year, but historically, such moves happen roughly two to three times a year, according to figures from Commonwealth Financial Network.
While many investors didn’t tune in every day as stocks inched higher over a prolonged period in 2017, the market’s got a way of grabbing their attention when it falls. Even so, tuning out from any hysteria is the key to long-term success in the market. And rather than selling, steep sell-offs may be opportunities to invest more.
Lower stock prices are an underappreciated perk of market sell-offs.
Lower stock prices are an underappreciated perk of market sell-offs. If your investment thesis still stands — and you have money to invest — now is a good time to consider adding to existing positions or finding new ones. But prepare for some possible angst: You could buy assets only to watch their prices sink even lower.
In addition, ensuring your portfolio is well-diversified will help you weather a market storm. You can easily broaden your portfolio’s exposure by investing in the following products: exchange-traded funds, mutual funds, bonds and individual stocks. Select investments within those groups across a range of geographies, industries and company sizes.
» Read more: How to research stocks
3. Look for perspective
Take a step back from the recent declines. U.S. stocks still are in the midst of history’s longest-ever bull market, with the S&P 500 more than quadrupling over that stretch.
There have been five corrections — losses of at least 10% from a previous high — during the current bull market cycle. When losses reach 20%, it’s a bear market. These are less common. There were only four from 1980 through 2017, the most recent of which helped usher in the Great Recession at the end of 2007.
Even if that worst-case scenario happens, there’s a silver lining. Bear markets are generally shorter — clocking in at 1.4 years on average, versus nine years for bull markets — and less severe, with average cumulative losses of 41% compared to gains of 480% in bull markets, according to First Trust Advisors.
Need more reassurance? The market has bounced back from worse. Perhaps you’re old enough to remember Oct. 19, 1987 — or “Black Monday” — when the Dow Jones plummeted more than 20%, the worst single-day sell-off in history.
» Want to minimize damage? Learn how diversification can reduce your investing risk