What to Do When Markets Plunge 500 Points
The sky is falling…. The sky is falling…
Quick everyone, sell everything. Sell first, ask questions later.
That sounds about right.
In early October 2018, that’s the panic that gripped the Street. The Dow Jones fell 500 points. The tech-heavy NASDAQ was falling to its 200-day moving average.
All as volatility reared its ugly head in the worst month of the year.
Not helping, bond yields were on the rise.
The benchmark 10-year Treasury note yield rose to 3.25% and hit its highest level since 2011. The 30-year bond yield also reached its highest mark since 2014. Neither sat well with traders. That's because they lead to expectations of tighter monetary policy, which can cap company profits, potential dividends, and throw a wrench into things.
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Technically, things don’t look so hot either.
After testing double top resistance, the Dow Jones fell below its 50-day moving average. Should current support fail to hold, we could plunge to the 200-day at 25,140.
But Don’t Panic
Pullbacks are healthy. And we have to remember markets do not just go up in straight lines.
The pullback -- particularly for tech stocks – was needed, argued Joe Heider, president of Cirrus Wealth Management, as noted by CNN. "The selloff is healthy. Since the market bottomed in March 2009, it's been more than 10 years of growth stocks leading the way non-stop."
But as long as the economy is growing, it’s nothing to be concerned about at all. In fact, it may be another buying opportunity on resiliency.
Above all else, never panic.
Have Cash on Hand
“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent,” says Warren Buffett.
Don’t Follow the Herd
One of the key reasons that many investors underperform in the market is because they move in and out of assets at the wrong time. When an investor sees everyone else making money from rising markets, that's when they tend to throw every spare dollar into their investments. Unfortunately, when that same investor sees a group of other investors selling, the investor sells, too.
In short, they get caught up in herd mentality.
A trader will often mimic the actions of a larger group so they don't feel left out of a trend, or miss what the herd believes is a “can’t lose” trade.
The rationale is simple.
It’s unlikely that such a large group of people can be so wrong.
Be in a Strong Position to Capitalize
With cash on hand, Buffett has the financial flexibility to jump on opportunities that popped up. As the billionaire often points out, keeping some cash on hand allows you to take advantage of corrections without having to sell other investments.
Remember that markets are resilient.
Don’t let a pullback chase you from the market. Remember, they’re resilience. Stay put.
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