I’ve been meaning to write this post for a while, but I was putting it off in favor of the Investing Series lessons I was asked to write. It’s related to investing, for sure, but I was hoping to finish writing about different types of investments before I got to this.
Whelp, now it’s necessary.
Because of the time-sensitiveness of this, I’m going to rely on some of the heavyweights in the field to do some of the talking. Besides, this way you’ll see it’s not just me who thinks this. The common wisdom in the personal finance world during these events is to sit tight, for this too shall pass. It’s not just me who thinks this, promise!
First things first – the dip on August 10th was not a market correction.
A correction is when the market falls by at least 10%. This is fairly common and usually temporary, although it can lead to a bear market or a recession.
Corrections often happen after the market has had a lot of recent gains, as we’ve been seeing. In the first two quarters of 2017, the Dow and the S&P 500 each gained more than 8%, while the Nasdaq went up 14%. Those are decent-to-good gains for a full year; they are great for half a year! But there has been a lot of speculation about a coming correction, because the gains seemed unsustainable. There wasn’t really anything to point to in the market that should have caused the gains, such as an emerging technology. Or, rather, there was as much bad going on as there was good, so it should have equaled out.
But the market isn’t rational, and neither are investors.
The August 10th, 2017 Drop
Yesterday, the major US indexes that we’ve discussed before (Dow, S&P 500, and Nasdaq) each dropped by an amount that is significant over a very short period of time. As of the close of the markets on August 10th, the Dow was down 0.93%, the S&P 500 was down 1.45%, and the Nasdaq was down 2.13%. The world markets (Japan, Hong Kong, London, and Germany) also went down.
Now, this was the third day in a row that stocks fell, so it wasn’t just Thursday. But Thursday was when people sat up and took notice.
I’m not one to attribute major stock market swings to single events. There is almost always more going on. That is the case on August 10th, 2017. But sometimes, we can point to certain things that *probably* caused people to either buy or sell quickly.
On August 10th, that big thing that had everybody speculating was the tensions and threats between the United States and North Korea.
I’m not going to get political here. My personal feelings do not and more importantly should not matter to you here. However, the feelings of investors as a whole and how they react after certain events does matter.
To that end, here are several different analyses of what caused the drop. While North Korea is mentioned in all of them, it isn’t the only thing that caused stock prices to fall.
Nasdaq.com: Stock Market News for August 10, 2017
The Motley Fool: What Happened in the Stock Market Today
What Should You Do When Stocks Prices Fall?
You can do whatever you want. I’m not going to tell you what to do.
I will tell you what I’m going to do, and I’ll link to some articles so you can do further reading.
I’m doing nothing. Not at this time, anyway. I’m not changing my asset allocation, I’m not buying more, and I’m certainly not selling. This is, so far, a very short term change.
More importantly, I’ve been through downturns before. I started investing in 2005. I kept investing through the Great Recession. I invested through 2015 and early 2016, when stocks took a tumble. Staying the course was the right thing to do.
When markets went into a true correction, I looked for more money that I could use to buy investments. For instance, I sold a house in 2015 and kept the profits in savings for awhile while I figured out what to do with it. In August 2015, I poured it into the market, buying a total stock market ETF weekly from August 2015 through January 2016. That turned out well for me, because I ended up buying near the bottom and the prices have since gone up considerably.
However, if I hadn’t bought near the bottom, I still would be happy with that choice. That’s because I know I can’t time the market. I’m not a fortune teller. I got lucky. So if I’d bought from August to January and then the prices fell another 20% from February to May, I’d still be happy because they are worth more now than when I bought them. And I was confident that was going to happen because I chose a broadly diversified fund.
Right now, I’m not going to change anything. If the market starts to tumble, I might look at my budget and see if I can tighten the belt a little bit to have some more money to put into the market. But I’m not going to sell. Taking money out of the market in an effort to time things very rarely works for the average investor.
What Do The Experts Recommend?
Check it out for yourself.
Fidelity: Six Strategies for Volatile Markets
The Motley Fool: The Worst Investing Move During a Stock Market Crash
Betterment: What To Do After A Market Drop
And finally, words from the Master:
Gentle reminder: I am not a personal finance professional. You should always do your own research before making changes to your finances and talk to a professional if you need additional help. Please read my full disclaimer here.