What You Need To Know About Stock Market Crashes
The sky is falling an d it’s the end of the world because the market is down 14% in the last week! This is how the media portrays what has been going on in the stock markets. However, it is most certainly not the end of the world. The S&P 500 has declined by more than 3% in one day 100 times since the 1950s. These declines are usually followed by a rebound as well. The stock market is a volatile place and while we have enjoyed a six year bull market sometimes the market needs to correct. Especially when Facebook is valued the same as Pepsi and Coke combined.
When you look back through history, stock market crashes of 33% or more, peak-to-trough, aren’t terribly unique. When the Dow Jones Industrial Average hit a high of 18,351.40, you should have mentally thought, “Alright, anything between here and a drop down to 12,111.92 is business as usual; nothing special and, in fact, might statistically happen”. If you had $500,000 in your combined retirement accounts, that would mean a paper loss in quoted value of $170,000, bringing you down to $330,000. Given your asset allocation is right and you aren’t speculating heavily in individual securities, this shouldn’t elicit more than a rough grunt of acknowledgement. It’s simply not worth noting once you’ve been around the block any more than a rational person freaks out when a thunderstorm showers the Earth with water or an eclipse covers the sun. That’s life.
The tips for preserving your wealth during a crash are having a balanced portfolio of cash and bonds vs equities and reinvesting your dividends. If you invest $100 per month in a basket of equities sometimes you will buy them for a high price and sometimes you get them for a low price. Overall though your cost basis should be lower than the current market value of your stock using this method. $100 when a stock is $50 per share will get you two shares then say it’s a year later and the value is $25 per share now you pick up 4 shares. At the end of the day on average the S&P 500 earns 8% per year. Just because the market is going down does not mean it is the end of the world.
See the tips to navigate a falling stock market and why you shouldn’t worry.
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About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.