Big market drops get everyone’s attention, but stock investors who have been in the game for a while know these plunges are not the end of the world, but a natural part of market cycles.
Although it is somewhat over-simplified, the market’s cycle is to expand (prices rise) for a period during which there are small retreats, but mostly an upward slope.
The markets reach a point where the expansion becomes “nervous.”
Investors know a correction (sell-off) is overdue, but no one wants to get out for fear that the correction may not come for days, weeks, or months.
Some event (economic news, war, and so on) tips investors over the edge and a sell-off happens.
Does it always happen that way? No, but it does often enough that big sell-offs are not events that veteran investors fear.
For example, on Oct. 19, 1987, the Dow plunged 22.6 percent – the largest percentage drop in recent history. The S&P; and Nasdaq also suffered significant drops.
Yet, in eight months, the loss was cut to five percent and completely erased in 16 months.
Of course, there are corrections and there are routes. In March of 2000, the Internet/Tech bubble of the late 1990s officially burst.
The Nasdaq lost one-half of its over-inflated value may not return to those levels in decades.
What’s the point? Investors know that over the long term stocks have consistently produced a solid return, but that there will be periods of no or stagnant growth.
If you can’t hold for the long term, stocks are probably not the investment vehicle for you unless you want to play the trading game, which most people will lose.