Read time: 4 to 5 minutes
When markets drop, your inclination may be to do something—anything—with your investments. But that may not be the best solution. We have some practical financial advice for when the balance in your account goes down.
Remember, this has happened before
Veteran investors may remember one of the worst drops. After the housing bubble burst in 2008, the S&P 500 fell by nearly 57% over the next two years. It was a scary time to be an investor.
What happened next showed how quickly things can change. Over the next eight years, the stock market nearly tripled in value.
Risk and reward are linked
This pattern of rises and falls is a familiar story for longtime stock investors. Stocks being risky may be what makes them high-performing investments over the long run. Investors must be paid higher returns to own stocks precisely because they are riskier than other types of investments.
So while we may want markets to rise continually without stumbling, stocks may offer higher returns over the long run because they hit rough patches occasionally.
How should I react when the markets drop?
Hang on to your long-term perspective
Bad news can make the market appear riskier than many investors would prefer. But if you take the long view, things might not seem so bad.
Can’t keep a good market down
At Vanguard, we believe that stocks can play a central role in achieving your goals over time, because of their greater potential for growth.
Stocks tend to outgrow bonds and cash over longer periods. That can make them a suitable investment for someone with a long-term goal, such as retirement.
The risk of playing it safe
It can be tempting to sell stocks and move your money into cash after a market downturn.
But that safety-first strategy runs headlong into a bigger risk—that you might not earn enough money to retire when you want to.
Some of the best returns on investments in stocks are realized immediately after a big decline. But only those who remain invested profit from the bounce back.
Consider your saving strategies
Own a balanced portfolio
For a long-term goal, like retirement, how you divide your money between the stock and bond funds in your portfolio is important.
Try choosing a mix of investments that gives you the best chance to reach your retirement goals—while also allowing you to sleep at night if the markets tumble.
Keep in mind, whenever you invest, there’s a chance you could lose the money.
Save more
Lower your costs
Every dollar you pay in fees and expenses for a particular mutual fund is a dollar taken out of your return. Over time, those dollars can add up.
Say you invested $100,000 and earned a 6% return. Paying an annual cost of 0.90% on your portfolio could cost you more than $100,000 in fees and expenses over 30 years.*
To minimize fees, consider investing in lower-cost funds. Index funds, for example, can have some of the lowest expenses in the mutual fund industry. One option is to invest in target-date investments.
*This is an example only. It doesn’t represent a real investment, and the rate of return is not guaranteed.
Target-date investments are subject to the risks of their underlying funds. The year in the investment's name refers to the approximate year (the target date) when an investor would retire and leave the workforce. The investment will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. A target-date investment is not guaranteed at any time, including on or after the target date.