Resist the Urge To Panic When The Stock Market Plunges

It’s been a roller coaster of a week for stock markets, and it’s not even Friday yet. Major stock indices around the world saw steep drops and a lot of action. Canada’s main stock index, the TSX, saw its worst day in more than three years on Wednesday and it closed in the red today too. US equities are on their longest losing streak (six days and counting) since Donald Trump became President. Bombarded by negative headlines, investors may be nervous and tempted to do something in reaction to the news. But your best move is probably to keep calm and carry on if you’re invested in the equity market through individual stocks, mutual funds, ETFs, or index funds. “These kinds of market panics are usually short-lived and investing is a long-term pursuit,” says RBC Global Asset Management’s Chief Economist Eric Lascelles. “The people who react drastically during these episodes usually regret it.”

Sure, it may seem like a perfect storm of recent events have hit stocks in North America and around the world—rising interest rates, a hurricane pounding the Southeastern US, and the IMF cut its forecast for global growth. “When you buy a stock, really what you’re buying is a future stream of earnings from a company,” says Lascelles. “So if you’re signing on to get a fraction of all the money that company will make going into the future and suddenly the outlook isn’t quite as good for economy, or perhaps it looks like companies might need to pay more money when they borrow, that future stream of earnings isn’t quite as attractive and that can cause stocks to go down.”

In addition to new developments, there are historical precedents to consider. This market volatility, complete with stomach-churning drops, is a seasonal occurrence. “October is the classic bumpy month for stocks, and in fact it’s fairly common to have a bad month in the lead-up to [US] midterm elections,” explains Lascelles.

With headlines describing this “global market bloodbath” as “utter carnage” you wouldn’t know that this volatility is par for the course. Wealthsimple Portfolio Manager Dan Tersigni says even though it may be tempting to react, your best bet is to do nothing. “The media will always use scary-sounding terms,” he says. “If nothing has changed in your goals or objectives and your saving situation, stick with your plan. We have reams of data showing that when investors react, they end up shooting themselves in the foot.”

That’s because the statistics prove that investors chasing returns have terrible timing. They do the opposite of “buy low and sell high.” Instead, they bail out of a stock or a fund when the going gets tough and they buy into an asset after it has started performing well.

Experts say sit tight and hang on, it will likely pay off if you’re in it for the long haul, meaning years not weeks. “We know that markets do rise over time and you get compensated for taking some risk and for enduring some of these fluctuations,” he says. “Sticking to your plan is almost always a better approach than trying to dance in and out of the markets.”

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