October is usually my favorite month: leaves changing color, pumpkin everything, and crisp clear mornings. I love October.
But this year I was sick — or dealing with a sick baby — for the majority of October. I really didn’t love October.
You know who else didn’t love October? Stock market investors.
The stock market lost nearly $2 trillion last month. If you watched any news about the stock market, you likely had a little scare. (note: the constant stock market reporting is terrible and most of us don’t need to listen to it. Turn it off.)
Before this latest tumble scares you off investing, let’s break down what happened and what you can do that is more productive than you automatically reaching for the panic button.
What causes the stock market to fluctuate?
The econ 101 answer is its supply and demand. Think of the stock market like an auction. There are people who own a stock that might want to sell it and there are people who don’t own that stock who might want to buy it. When the buyer and the seller agree on a price, that’s the new price of the stock.
If there are more people wanting to buy a stock than there are willing to sell it, prices are going to go up. It’s in demand.
If there are more people wanting to sell a stock than there are people who want to buy it, that’s when you see prices start to dip. As sellers get more eager to offload a stock — for whatever reason — the price for that stock will start to plummet.
When the stock price for a single company is moving up and down, it usually has something specific to do with that company and how their investors feel about it. They may have released an earnings report or announced a new product.
When the entire stock market makes big moves, there’s usually not one single thing that you can pinpoint that is causing the market to move. It’s based on people’s emotions and predictions about what the future holds. Think of the stock market like your really dramatic friend. Little pieces of information can send it into highs or lows and there’s not a lot of rationale as to why.
So what’s currently spooking investors? There are a few big things:
- Trade wars anyone? The US-China trade war has investors nervous.
- Concerns over global growth slow down
- Federal Reserve raising interest rates: worry that raising the interest rates will slow the economy and in turn, slow company profits. Read more about what these interest rates mean for you here.
Correction, bear, and crash. What do these all mean?
The stock market moves a little every second. And it’s every movement is reported — and possibly exaggerated — on the news. Most of us don’t need to know daily whether the stock market closed up, down, or sideways.
A stock market correction is a temporary decline in price of 10% or more. We’ve had two market corrections this year: in February 2018 and in October 2018.
A bear market is a long, sustained decline in the stock market. Once losses pass 20% from the most recent high, we are considered to be in bear territory.
A crash is a sudden drop in the stock market of double digits. This is usually unanticipated and really leaves everyone in a blind panic. The most famous crash was in 1929 that set off the Great Depression. We didn’t have another crash until 1987. And our most recent crash was in 2008.
How often does all of this happen?
Since 1980 the S&P 500* has had 26 corrections. Of those 26, four have turned into bear markets. Some of these corrections are incredibly short, like the 13-day correction in February 2018. Some of these corrections have turned into long, drawn-out bear markets, like the 929-day bear market in the early 2000’s.
(*remember the S&P 500 is a stock market index based on 500 of the largest public companies in the US. It gives us a measure of how the stocks in these big companies are doing.)
What should you do when it goes down (or up)?
People make money off scaring you with headlines. And yes, you should be scared if you have sunk every dollar you have into the stock market and you’re hoping to turn a quick buck and sell it for a profit in a short amount of time.
But if you’re investing for the long-term (10+ years) and you’ve built up some sort of an emergency fund that you can lean on, those fluctuations shouldn’t scare you. Irrationally, the will. But rationally, they shouldn’t.
What should you continue to do when things start looking a little grim? Here are some ideas:
If you have an automatic deposit set up into your retirement or another investment account, don’t cancel that. Here’s why: when things get volatile, you can’t predict what’s going to happen. The stock market could have it’s worst loss in history followed a few days later by it’s biggest gain in history. You just never know.
Remind yourself that investments are for the long haul.
When you’re used to seeing your investments go up, it can be unnerving to see them head south. Now is a perfect time to remind yourself that your investments are there to support your long-term goals. You can weather the ups and downs right now in pursuit of long-term growth.
Make sure you have a solid emergency fund.
If you need money in the short term (less than 5 years) experts recommend that you don’t keep it in stocks. This correction should be a reminder of how important it is to keep the money you need soon someplace safe and easily accessible.
Revisit your “WTF is going on in the world” point.
We all have a point of panic and there’s nothing that helps you identify what yours is like the threat of seeing your hard earned money disappear. If a market downturn has you sweating and unable to resist pushing the “sell” button on your investments, you might be exposing yourself to too much risk. When you have your money weighted mostly in stocks, as opposed to bonds, you’re setting yourself up for the potential of bigger gains, but also bigger losses. Reevaluate whether you have the right mix of stocks and bonds.
If you use a robo advisor, they should have an easy to read breakdown of where your money is invested (what percentage is in stocks and what percentage is in bonds). Try going through their risk questionnaire again and seeing if you come up with different results.
If you manage your own investments, you can use Personal Capital to get a quick overview of what percentage of your investments are in stocks and bonds. You just link your investment accounts to the free tool and it will give you a combined summary telling you what percentage of your investments are in stocks, bonds, etc. It’s so easy.
This snippet of my Personal Capital tutorial video will show you exactly how to do that.
Remember that there are opportunities at the bottom.
“Be fearful when others are greedy, and greedy when others are fearful.” – Warren Buffet
If you get excited when you see the market drop and you love a little risk, opportunities abound when the market goes down. It can be a great time to pick up stocks at a discount. But just remember: you don’t know exactly when we’re hitting the bottom of a correction, so if you are excited to put more money in when the market dips, make sure you can stomach keeping it there if the market continues to go lower.
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