Few things are as unsettling to investors as a market crash or correction. Just when you’ve enjoyed a period of generally rising investment values, the value of your portfolio has suddenly dropped. It’s enough to make many of us lose sleep.
Here, then, are three things to keep in mind that might help you sleep easier during a market downturn. (They can be especially powerful when combined with some warm milk or a vacation from your smartphone!)
1. Remember: markets will always be volatile
The first thing to understand is that market declines are normal. They happen every few years. Each and every one in the past has also been followed by a recovery, and recoveries often occur within a few months, although some can take a few years. Better yet, the markets have also made new highs after market declines.
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Take a look at a graph of the stock market’s performance over many years, perhaps measured by the S&P 500 either Dow Jones Industrial Average index. It may look like an upward sloping line, but if you zoom in, you’ll see that the line is jagged, with lots of small and large dips and rallies.
2. Remember: Recessions Bring Stock Bargains
This fact about stock market crashes and corrections is really exciting: They slap a big “On Sale!” You sign on a lot of stocks you’ve been wanting to own, or stocks you already own and would love to buy additional shares of.
Consider Semiconductor Specialist nvidia, long a beloved market. His shares recently fell nearly 52% from their 52-week highs. So if you were drooling over the action at its peak, you got a huge discount. Interested in the hotel industry disruptor airbnb? It was recently 47% below its 52-week high. Apple down 25% and amazon.com down 43%.
Not all deep discounts automatically represent bargains. You should still research any company of interest to assess its financial health and growth prospects, and then make sure it is reasonably valued or undervalued.
3. Remember: your losses are probably paper
Finally, it might help you sleep easier if your portfolio’s value has dropped dramatically but you haven’t actually sold any shares, because in such a situation, you just have what’s known as a “paper loss.” In other words, you still have a chance to see those losses disappear. You still own the shares, and presumably the underlying companies will continue to appreciate in value over time.
The two stock prices that matter most to investors are the price at which you bought a stock and the price at which you sold it. Those two prices determine whether you made a profit or a loss. The share price when it temporarily tanked three months ago or five years ago shouldn’t matter much.
So take a few deep breaths. It’s very reasonable to be shaken by a market downturn or recession, but savvy investors know that it’s usually best to hang on and, if possible, buy more stocks.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Selena Maranjian has positions at Amazon and Apple. The Motley Fool has posts and recommends Airbnb, Inc., Amazon, Apple, and Nvidia. The Motley Fool recommends the following options: $120 long calls in March 2023 at Apple and $130 short calls in March 2023 at Apple. The Motley Fool has a disclosure policy.