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The stock market experienced its greatest crash in over 30 years this month, largely fueled by fears of the Coronavirus pushing the global economy into a recession.
If you’ve recently started investing, this can make you extra anxious. After all, you’re investing to make your money grow, not to lose it! And when the stock market drops, you can lose a lot fairly quickly. I’m personally down over $40,000 at the moment 😐
But it will all be ok. Markets are designed to fluctuate (sometimes wildly!), and the downs will always come back up.
In this post, we’ll look at what it means when stocks drop and what to do when the stock market drops
What Does It Mean When Stocks Drop?
Stocks are basically shares in a company. When you buy a stock, you’re lending that company money in the hopes that the company puts your money to good use and makes the company more valuable. In a strong economy, lots of people are willing to invest their money in companies because they expect companies to grow more valuable, which will make their shares more valuable. Ultimately, most people plan to sell their stocks at some point for much more than they originally paid.
Stock prices change every day. When people have faith in the economy, they are willing to invest more of their money, making stock prices rise. But when people get scared, they lose faith in the market. Many people get so scared that they sell off their stocks. This floods the market with stocks. So now there’s an extra supply of stocks, and a lower-than-normal demand since people are afraid to buy. So stock prices tumble.
And when stock prices tumble, people get even more scared, and this can lead to a bit of a downward spiral.
What to Do When the Stock Market Drops
So, if you have money in the stock market, what should you do when the stock market drops?
I’ll tell you what to do when the stock market drops: absolutely nothing.
That’s right! You just continue about your life as normal. Continue with your long-term investing plan as if nothing crazy is happening.
I’m not saying this is easy to do. When I saw how much I was down, I immediately wanted to pull all my money from the market and stuff it under my mattress depression-era style. But that’s actually the worst thing you can do, both for yourself and for the economy as a whole. Because, again, downward spiral.
Now, some people will tell you to immediately go out and invest as much as you can in stocks when the stock market drops because it’s like stocks are on sale. On February 10, 2020, a single share of Google stock would have cost you $1,520.74. But on March 20, 2020, that same share costs you just $1,128.63. You save almost $400 per share!
But that might not be the best idea…
The Case Against Investing a Ton of Cash When Stocks Drop
I don’t personally like to go out and buy a bunch of stock when the market drops for 2 key reasons:
- I don’t want to tie up my cash. The market typically drops because of some uncertainty (cough, Coronavirus). This could have a big impact on my ability to make money, depending on whether or not my clients have the money to spend on my writing services in the tough economy. So I’d prefer to keep a little extra in my good ol’, easily-accessible savings account for now.
- We don’t know what’s going to happen next. Yeah, prices are down today. But will they go back up tomorrow? For all we know, that $1,128.63 Google stock might only be worth $800 a couple weeks from now. Perfectly timing the market is impossible. I’m not going to waste my time or my sanity trying.
Instead, when the stock market drops, I’m going to go about my business like the world isn’t falling apart.
Things may get worse before they get better. But give it time, and the market will always come back.
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