Advice: When the Stock Market Drops, Stay Calm and Do Nothing

Think of what’s happening in the stock market as a kind of fire drill. As we all know from childhood, one of the primary rules is not to panic. And in this case, panicking would mean selling stocks when the market is falling.

You run drills to stay sharp, but we haven’t had much experience with the S&P 500 stock index falling by more than 3% in a single day. According to Howard Silverblatt of S&P Dow Jones Indices, the last time it happened was Sept. 13, 2022.

Given that it’s been a nearly two-year stretch, we can excuse ourselves for getting a bit sloppy. So many people got nervous and ran to check or trade investments Monday morning that many of them had trouble logging into brokerage firm websites and apps including those of Charles Schwab, Fidelity and Vanguard.

But really, why sell at a moment like this? It’s not a rhetorical question, so let’s try to answer it.

Selling is smart if you know that the stock market is about to fall by a lot and stay down for a long time. Most people don’t know, however, and those who got it right in 2022 or 2020 or 2008 or 2000 or 1987 may not know the difference between the skill they think they have and the luck that probably helped them back then.

Many people who traded furiously Monday are professional investors of various sorts — or the robots they programmed to automatically sell when this or that indicator flashes yellow or red. But here’s a dirty little secret about, say, hedge funds: All of their trading in reaction to world events doesn’t lead most of them to do better than sticking money in an index fund that tracks the stock market. Mutual fund managers don’t do much better.

If you need money soon that you have invested — say, for a down payment or college tuition — this is probably a scary moment, and selling might make sense. But if you are frightened, remember the feeling. Going forward, perhaps any money you might need quickly should not be in the stock market at all.

Much of the money you have in stocks is probably for retirement. Chances are, you won’t need it for many years or even decades.

While it would be a neat trick to move all of your money to cash when the market is falling and then buy stocks again when the stock market has bottomed out, the bottom is often the time when investors are most scared. Most people can’t call a stock market bottom in the first place, let alone get up enough courage to bet all of their cash on that call.

Still, rational thinking often eludes us in moments like this, and fear is nothing to be ashamed of. Here are a few things that may make you feel a little better.

First, consider the early days of the pandemic, when stocks fell by more than a quarter in the space of a month or so. Who would have thought that within a year, market gains off the bottom of the market would wipe out those losses and then some? But that’s what happened.

Now, consider other future facts that remain elusive: We don’t know who will be the next president of the United States, or what kind of hurricane season it will be. Try, if at all possible, to revel in the wonders of an unpredictable world and consider the possibility that good news can happen and the markets can react accordingly, even if we can’t predict most of it.

Second, look at the performance of your investment portfolio over the past year or three or 10. Chances are, you’ve made a lot of money if you’ve invested regularly and then left things alone. Nice going! Try to think about those enormous gains and not any smaller paper losses from Monday’ drop.

Now, consider what would have happened if you’d sold all your stocks in 2020 when the pandemic was at its scariest. The S&P 500 has more than doubled since then.

Finally, and as ever, you are not the stock market. If you have, say, one-third of your savings in cash, bonds or real estate, your overall paper losses in your investment portfolio are less than whatever Monday’s stock market losses end up being. Cash, after all, did not melt down.

Moreover, you are the sum of many large parts, including home equity and future salary, not to mention the immeasurably high returns that come from friends and family and playing outside and taking in art.

Go fly a kite or wander among beautiful buildings and check in with the market again tomorrow.