Last week was a rocky one for the stock market.
In a single day, the Dow dropped 832 points, which constituted one of the most substantial declines in its history.
The ASX 200, S&P 500 and Nasdaq also took a beating, so much so that if you checked your portfolio at any point last week, there’s a good chance your first inclination was to sell before things got worse.
But hopefully you didn’t sell. Hopefully you did the smart thing by sitting back and waiting to let things play out. And if you didn’t, let this be a lesson: Volatility is a cornerstone of the stock market, and it isn’t actually something to be afraid of.
The worst way to deal with a stock market decline
One thing you must remember about stock market volatility is that you don’t actually lose money until you react to it. That gasp-worthy loss you might’ve seen on your computer screen last week when you checked your portfolio balance? Unless you sold anything, it was only hypothetical.
Stock market fluctuations — even sizeable ones — are completely normal and even somewhat predictable. And last week’s downturn, if we even want to call it that, was by no means catastrophic.
In fact, the Dow, S&P, and Nasdaq are still very much up since the start of the year despite the dips they just took. The S&P/ASX 200 index is faring a little worse, down 2% so far in 2018, but hardly a disaster, especially if you take dividends into account.
If you let yourself panic every time the market falls by a few percentage points or even undergoes a full-fledged correction (a decline of 10% or more), you’re going to harm your health and possibly your finances if said panic leads you to make rash decisions.
Not only are corrections fairly common — they happen, on average, about once a year — but the market has historically recovered from them and then some.
In fact, the only real way to get hurt by a market dip or correction is to take a short-sighted approach to investing.
If your goal is to put some money into stocks and get out quickly, then yes, a decline could spell serious trouble. But if you have a longer investment horizon — say, 10 years or longer — you’re more likely than not to come out ahead, provided you leave your portfolio alone when the market does tumble.
Of course, this doesn’t mean you have to sit back, do nothing, and let those market dips play out.
While it’s generally not a good idea to sell off investments during a downturn, one thing you can do is try to capitalise by buying the right stocks on the cheap.
The best way to make money
But make no mistake about it: The best way to make money through stock market investing is to put money into strong companies and hold those positions for the long haul.
One final thing: Make sure to have a healthy supply of emergency cash in the bank at all times. The last thing you want is for an unplanned bill to land in your lap during a market dip, thereby forcing you to sell investments during a week like this past one.
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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.