Few things are as unsettling to investors as a market crash or correction. Just when you’ve enjoyed a period of generally rising values for your investments, your portfolio’s value has suddenly shrunk. It’s enough to make many of us lose sleep.
Here, then, are three things to keep in mind that might help you sleep easier during a market downturn. (They can be especially powerful when paired with some warm milk or a vacation from your smartphone!)
1. Remember: Markets will always be volatile
The first thing to understand is that market downturns are normal. They happen every few years. Every single one from the past has been followed by a recovery, too — with recoveries often happening within a few months, though some can take a few years. Better still, the markets have gone on to new highs after market crashes, too.
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Take a look at a graph of the stock market’s performance over many years — perhaps as measured by the S&P 500 or Dow Jones Industrial Average Index. It might look like an upward-sloping line, but if you zoom in, you’ll see that the line is jagged, featuring many small and large drops and recoveries.
2. Remember: Downturns bring stock bargains
This fact about stock market crashes and corrections is actually exciting: They slap big “On Sale!” signs on many stocks that you’ve been wishing you owned — or on stocks you already own and would love to buy additional shares of.
Consider semiconductor specialist Nvidialong a market darling. Its shares were recently down nearly 52% from their 52-week highs. So if you were drooling at the stock at its high, you got a huge discount on it. Interested in the hospitality industry disruptor Airbnb? It was recently a full 47% off its 52-week high. Apple was down 25%, and Amazon.com was down 43%.
The deep discounts don’t all represent bargains automatically. You should still research any company of interest to assess its financial health and growth prospects — and then make sure that it’s reasonably valued or undervalued.
3. Remember: Your losses are likely paper ones
Finally, it might help you sleep easier if your portfolio’s value is down sharply but you haven’t actually sold any shares — because in such a situation, you only have what’s referred to as a “paper loss.” In other words, you still have the chance to see those losses disappear. You still own the shares, and the underlying companies are presumably still going to grow in value over time.
The two stock prices that matter most to investors are the price at which you bought a stock and the price at which you sold it. Those two prices determine whether you netted a gain or loss. The price of the stock when it sank temporarily three months ago or five years ago shouldn’t matter much.
So take some deep breaths. It’s very reasonable to be rattled by a market crash or downturn, but experienced investors know that it’s usually best to just hang in there — and, if possible, to go shopping for some more shares.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Selena Gomez Maranjian has positions in Amazon and Apple. The Motley Fool has positions in and recommends Airbnb, Inc., Amazon, Apple, and Nvidia. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.