Given the recent drops in the stock market, you might be feeling some kind of way about your investments. You might be experiencing a range of emotions and confused over what to do next.
Well, I’m here to help you through this stock market correction.
Many of us have seen a lot of our net worth erode as the market corrects itself (funny, because nothing feels correct about losing money). It’s shocking. After seeing consistent gains and feeling like a winner, you suddenly got a dose of market volatility and it can feel humbling. Luckily, there is a playbook for these scenarios. Follow these steps and you will emerge on the other side of this stock market crash looking great and still on track in your journey to wealth.
Step 1: Stay Calm
Emotions are your enemy right now. Emotions are the biggest reason casual investors underperform.
As we go through any market correction, I find myself having the same conversation every time:
Friend: “Man, WTF. The stock market is crashing! What do I do?!?!”
Me: “Calm Down”
Friend: “F!&# $#%”
Me: “Ok. We’ve talked about this. You don’t need to do anything. Ride it out”
Friend: “What are you talking about?!?! I have to save my money. I’m going to sell!”
Me: “No. Give it a chance. Aren’t you still up? If you sell now, you’ll lock in your losses.”
Friend: “I hear you, but …”
Me: “We’re in the long game for wealth. Breathe.”
The gut reaction when we see stocks dropping is to sell. Sell everything. Save what you can. Get out and run. All you can think about is how much money you could lose and why the stock market is really a hustle (it’s not).
Selling when your stocks are low is a great way to guarantee you lose money. You haven’t realized a gain or loss until it’s sold, so instead of selling your stocks when they are low, sell them when they are high. You bought that company, ETF, or robo-advisor account because it made sense for a long-term investment. Don’t doubt yourself.
Staying the course can be hard when you see your net worth falling. Keeping your emotions in check and remaining calm is important to ensuring long-term wealth creation.
One way to stay calm is to stop checking your accounts. Delete the app. Block the website. Whatever you need to do to stop obsessing over the minute by minute value of your investments. Don’t look at your brokerage or retirement accounts.
As much as you can, stay away from any financial news. People love to freak out and panic during a stock market crash. The financial news feeds on this and sometimes forgets to mention the “don’t panic” part. The news will stir emotions that will hurt you, not help you.
You may scoff at the importance of controlling your emotions. Trust and believe that many people have ruined themselves by taking actions based off of emotions and feelings instead of sound financial strategies. Don’t become one.
Step 2: Keep Investing
Now is the best time to invest!!!
Yes … you should be putting more money into the market.
Now that you are staying calm, let’s talk through this. The most common way to make money in the stock market is buying shares at a low price and selling them later at a higher price. It’s important to understand that price isn’t just the stock price, but the underlying value of the stock. You want to buy things when they are undervalued and sell them when they are overvalued.
When the stock market crashes, stocks drop in value. Many of them suddenly become undervalued compared to what they are actually worth, their intrinsic value. This means they become cheap and present good investment opportunities.
So why wouldn’t you buy stocks when they are cheap?
During a stock market correction, the underlying companies don’t suddenly change. When Amazon stock drops and headlines of Jeff Bezos losing $6 billion overnight dominate the web, does anything actually change at Amazon? Are they suddenly pausing deliveries because of the money they lost.
Yet, their stock may suddenly be undervalued by the market compared to what it’s actually worth. Multiply that one example across thousands of companies during a stock market crash, and you can understand why now is the time to buy.
You don’t need to obsess over finding the right stock. A good market ETF, like VTI, or a high-quality robo-advisor, like Wealthfront will allow you to quickly and easily buy during the downturn. Investing here will allow you participate in the eventual return to sanity.
Lastly, if you are investing monthly through a 401k or IRA … keep it going. Now would be a great time to increase your monthly contributions or to get started. Remember, it’s a sale!
If you’re looking to get started investing now, there are new brokerages offering free trades and $0 in commissions. You can sign up for Robinhood today and start picking up new stocks today.
Step 3: Ride it Out
Now you are calm and not letting your emotions determine your actions. You’ve committed to keeping investing and picking up investment bargains. You’re on track to surviving this stock market crash.
Now you need to just ride it out.
Bear markets, market corrections, and stock market crashes don’t last forever. Don’t be fooled, they can last for years, but if you stick to your principles you will continue along your journey to wealth.
Step 4: Go Searching for Opportunities
If active trading is a part of your long-term wealth strategy, then now is the time to go hunting for opportunities. Now is when the irrationality of the markets can create great long-term opportunities. Many companies with great fundamentals, strong dividends, or great businesses will become undervalued as all the irrational investors sell.
Take some time to understand Value investing as a strategy for investing in the stock market. Value investing hinges on finding companies that are undervalued in the market using a variety of public information. It looks to understand the true value of a company based on business fundamentals and exploit where the public value is off. Since investors often overreact to news, over time the public value should rise to meet the true value. This methodology provides a framework for choosing companies to invest in.
During a market correction, the sudden drop in the value of so many companies results in many buying opportunities. Those who take the time to research and make smart investments can benefit greatly from the remains of a stock market crash.
It’s Going to Be OK
Stock market crashes always feel worse than they really are. Building wealth is a long-term game and a temporary setback isn’t enough to derail the journey.
More importantly, instead of being afraid of the market drop, recognize the opportunity in front of you. Understanding the irrational nature of the market brings opportunities for someone looking to build long-term wealth.
Need a place to vent and talk about this market drop? Leave a comment below and let’s talk.