What to Do When the Stock Market Drops

Making a rash decision to exit the stock market or sell shares in response to a drop is rarely the best way to react. Instead of panicking, wise investors understand that ups and downs are to be expected. They soldier through by sticking to their long-term plans, taking time to understand the current situation and making only deliberate, well-thought-out moves.

stock market crash
Getty Images/iStockphoto

Low stock market days may continue for a while as economic realities shift around the world. But you don’t have to let the rises and falls determine your investing choices.

Instead, follow these steps to avoid panic and maintain a strong, stable portfolio:

1. Remember that the market is unpredictable.
“Expect that drastic changes in the market will always happen and it will always feel ‘different this time’ and it will always feel ‘unexpected,’” says Michelle Smith, CEO of Source Financial Advisors. “Building the unexpected into your financial plan is the smartest investment strategy.” (Full disclosure: Michelle Smith is an investor in and board member of DailyWorth.com, Inc.)

It’s not uncommon for the stock market to go down 3 or 4 percent one day and come back up 2 percent the next day, says Bob Gavlak, CFP, wealth advisor at Strategic Wealth Partners. “When there’s big news or major political or social events around the world, the markets tend to overreact,” he says. “Although the market can be volatile on a day-to-day basis, investors should [have] a long-term outlook.”

2. Focus on the long game.
Over time, the most successful investors are the ones who have far-ranging goals in mind and don’t get hung up on daily or weekly market swings. If you haven’t already, develop a strategic investment plan that considers where you want your investments to be in five, 10, or 20 years. “When you have a longer-term vision in place, you can say, ‘Okay, the market may not be good this week, but my plan is focused on X, Y and Z goals. I knew there would be fluctuations, and I’m okay with that,’” Gavlak says.

3. Talk with your financial advisor.
If you work with a financial advisor, she should communicate with you when the market is volatile, explaining what to expect and why. “Even during volatile times, your investment strategy should be a source of comfort, not a source of stress. If it is a source of stress, something is wrong,” Smith says.

For instance, during the most recent market declines, Gavlak had conversations with several clients who wanted to use the opportunity to invest some extra cash they had on hand. “If you have the cash to buy when the market is low, you’re buying everything on sale,” he says.

4. Make adjustments when necessary.
Even if your long-term investment strategy is sound, there will be times when tweaking or completely changing the plan may be warranted. When your life goals or plans change — or your tolerance for risk goes up or down — take an honest look at your strategy and adjust it accordingly. “The problem with the financial services industry is that we ask all of these questions about your risk profile, which is a questionnaire full of ‘what if’ questions all geared to setting up your assets for the maximum risk you said you are willing to take,” Smith says. “No one really knows how to answer these questions, especially if you filled out a form online, and how do you know what you can stomach until it happens? If you’re still panicked after understanding what’s going on with your portfolio in what will hopefully be a temporary stretch of choppiness, then it’s time to reassess your strategy.”

[Editor's note: This was orginally published August 31, 2015.]

You Might Also Like:
Get Over Your Fear of Investing — Even in a Bad Market
Investing 101: What You Need to Know
How to Invest When You Don’t Have Much to Invest