The Market Dropped. Now What Do I Do?

Whenever stock market indexes fall dramatically, it can be pretty scary.

But perspective is always important.

In context of other big stock sell-offs, the most recent drop wasn’t as significant as, say, the beginning of the financial crisis in 2008, when markets shed about half of their value, losing some $30 trillion of wealth.

Fact: The market goes up and down

As stock returns have headed steadily upwards in recent few years, it’s easy to forget something important: The market is normally volatile, which means it’s subject to swings, and there will be good years as well as bad years.

In fact in the course of most years, some experts say it’s normal for markets to experience something called a correction, which is when indexes drop 10% or more from a previous high.

Here are some tactics to think about

Diversify

It’s never smart to put all your eggs in one basket. It’s a good idea to consider investing in a mixture of bonds, stocks, sectors, industries, and geographies. Maybe you have too much in technology-focused funds, or blue chips, or small cap companies. The world’s a big place, and there are ten economic sectors to consider. You can invest in clean tech, cybersecuirty, and healthcare, to name a few other options. You can also invest internationally, in emerging markets, Asia, and Europe.

Consider putting money in bonds.

As the stock market has scaled ever higher heights in the past year, it’s likely your portfolio may be over-allocated toward stocks, because that’s where the big returns have been. Bonds, which are essentially IOUs from the federal and local governments, as well as companies, are generally considered safer investments. Since the financial crisis, bond returns have been pretty muted, at about 2%. But with short-term interest rates going up, the interest rate on longer-term bonds appears to be increasing too. The yield on 10-year Treasuries, for example, has risen about 0.5% over the past year to about 2.85%.

It’s important to remember, however, that bonds have risks tied to interest rate increases.  When interest rates go up, the price of bonds falls.

Think about

These are hard assets including metals (think gold, silver and nickel), grains, livestock, and foods. Commodities can act as hedge against inflation, according to some experts, since they tend to increase in value as inflation rises.

Inflation can have a negative impact on stocks. And as we wrote recently, fears about inflation have sparked some of the current market turmoil.

Commodities, however, can be volatile. As they are based on real-world products, they can be more subject to shocks related to supply and demand.

Don’t panic, you’re an investor

It’s important to keep in mind that there is no way to eliminate uncertainty from investing completely. But with some planning, it’s possible to minimize the risks you face in the market.