What should I do if the markets drop?

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

You’ve seen this movie before. Historically, the stock market drops at least 20% in value twice every decade.

You may remember one of the worst drops, because it didn’t happen all that long ago. 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.

But what you may not remember is what happened next. 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.

Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Can’t keep a good market down

When you take a step back and look at the full scope of market swings, you will discover that whatever the market is currently going through will, most likely, be temporary.

Focus on achieving your goals

Source: Vanguard. Stocks represented by S&P 500 Index, bonds by the Spliced BloomBarc USAgg Flt Adjlx, cash by the Money Markets Fund Average.

This is an example only. It doesn’t represent a real investment, and the rate of return is not guaranteed. The account balance is before any taxes. It does not reflect the 10% federal penalty tax you may have to pay if you take money out before age 59½.

Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index

You don’t invest to earn a certain return. The purpose of investing is to achieve what you might want in life—like a nice home, a good education for your kids, or a comfortable retirement.

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 bounceback.

Consider your saving strategies

You can’t control what the market does from one day to the next. But you can control how it affects you by considering these 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

You can increase your chances of achieving your goals by saving more. For a comfortable retirement, Vanguard suggests you save between 12% and 15% of your salary each year (including any employer contributions).

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.

Vanguard target-date investments

*This hypothetical example does not represent any particular investment and the rate is not guaranteed.

Bond funds are made up of IOUs, primarily from companies or governments. These funds risk losing value if the debt isn’t repaid on time. Also, bond prices can drop when interest rates rise or the issuer’s reputation suffers.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.