The Market Is Tanking. Shouldn't I Sell?

Questions about the market dropping are really common, and it's a tough one for many people because our gut reaction is often, "Woah, this is going really badly! I need to get out of here until things chill."

The catch with that mentality is, it wasn't until the market had already dropped significantly that you started feeling bad about how things were going, and it isn't until it has been going up for quite some time that you start to feel good again. The problem when that happens is when you sell, you then aren't invested to catch the upswing of the market. The people who do get to ride the upswing are the ones who don't sell in the first place while the market is falling.

What often ends up happening with people when they invest is they see the market drop considerably, so they sell. The market falls a bit more and they're proud of themselves, and then stocks start to recover. Once it has gone up a good bit they start to feel that maybe the market really is on the upswing, so they buy back in, but often at a price that might be 10 percent or more higher than what they sold at. Effectively, that person loses over 10 percent of their portfolio, while the person who doesn't sell at all doesn't take that hit and is far better off than the person who was scared out of the market.

Instead, when the market drops, the smart investor realizes that this is a golden opportunity. Let's think back to October of 2007, when the S&P 500 was well above 1,500. Just a year and a half later in March of 2009 (corrected from the video), the same index was down below 700. What this means for those investors who managed to invest at the bottom is that they could have seen a return of 130 percent on their investment just from the market recovering to where it was before, and today in 2017 the S&P 500 is far above the high from 2007.

You see, in US history so far, our stock market has never not recovered after a drop. For you and me, this means that when prices drop we have a very good chance that they're coming back over time to where they were, and they often rebound fairly quickly. So when you see the market drop, instead of asking whether you should pull your investments out, what you really should be doing is figuring out how much extra you can put in.

On October 9, 2007 the S&P 500 closed at 1,565, and on March 9, 2009 the index closed at 677. Recovering from 677 to 1565 is a 131% increase.

Stock market data taken from the latest release of DFA Returns 2.0 software. The S&P 500 index is a broad-based index comprised of the 500 largest companies in the US. Past performance does not guarantee future returns.