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How To Respond To Broad Stock Market Drops

Posted By Jim On 02/28/2007 @ 11:06 am In Investing | 12 Comments

I’m not an investing expert but I think I am a relatively seasoned amateur investor in that I’ve seen a lot of things and can draw up conclusions based on that experience (of an amateur investor) that may be helpful for anyone who is searching for what to do after a drop like yesterday. The largest drop since the day after the NYSE opened after 9/11/2001 occurred yesterday in which every major American stock index fell and so you may be wondering what it is you, amateur investor, should do. If the markets recover from yesterday, it won’t be such a bad thing to have a little bit of a correction, but if this is a slide that indicates the start of a recession, Greenspan made comments about a recession over the weekend which didn’t help matters; this may be an excellent buying opportunity.

1. Don’t sell anything (yet).

Don’t let emotions cloud your judgement, let this all shake out before making any decisions one way or another. I haven’t touched any of my funds because I want to wait to see how things play out before making any decisions. If you own individual stocks, their fundamentals haven’t changed (the market’s realization of broad market fundmentals haven’t really changed either, it’s just some panic, profit taking, and other activity going on trying to take advantage of the situation) so don’t go into massive sell-off mode. The market could rebound or it could tank, you can’t reliably guess which way so you might as well not guess.

2. Analyze your asset allocation

If you don’t like doing nothing, consider looking at your allocations. Since stocks took a hit and bonds rose, you may want to take a look at your asset allocation and perhaps readjust in the coming weeks as things shake out. This may have been a wakeup call that your allocation is stock heavy; did the big drop give you the shakes? Maybe you have too much for how much risk you can handle.

3. Load up on discount stocks

If you liked a stock on Monday, you probably like it more now because it’s much cheaper. Every stock I own fell yesterday and if I had a spare nickel in my Roth IRA, I would’ve bought some more of the stocks I held because there was a sale yesterday! (see that silver lining?) Take Disney for example, a stock I own that has been a high flier, you may have wanted to buy some but thought that the 30% runup the last year or so made it too pricey for you. Well, yesterday Mr. Market declared a 1 day sale of nearly 4% off on shares of Disney – go buy some!

4. Consider putting in a little more into that 401K

Are you contributing the minimum into your 401K? Consider loading up a few more percentage points and getting your money into the market after a discount and then ratcheting it back a little bit after the market recovers. It does smell a little like micromanaging your 401K, I agree, but if you can spare a few bucks it’s certainly a better time (than two days ago) to give your 401K a tiny boost when you know your dollars will go farther.

None of this is financial advice, it’s just the thoughts of a 26 year old amateur investor who has experienced a few market falls, this one hardly even registers when you compared it to the doozy felt in 2001 (tech bubble, 9/11). Anyone else have any helpful tips on how to react? I’d be particular interested to hear from folks who have been investing longer than I have and have seen bigger corrections in both the stock market and other markets.


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