Yesterday, the U.S. stock market saw a complete rout, with the Nasdaq and the S&P 500 falling significantly, and with the Dow dropping by more than 250 points. Today, things do not look as though they are off to a start that offers any hope for a better day, with the Dow already significantly lower in early trading.
For most people, the stock market represents a sort of litmus test for the economy: When stock market crashes, it means that the economy is doing poorly. And there is some truth to that. Companies are lowering their forecasts for the second half of the year, and unemployment continues to rise (something especially pronounced since the end of temporary Census hiring). But is a down stock market always something to be afraid of? For some, a down stock market is rather a boon than a bane. But, as with so much related to finances, it depends on your situation. Regardless, stock market investing requires getting control over our immediate emotions.
When a Down Stock Market is a Boon
For those who have time on their side, a down stock market is a blessing. Right now, it is possible to get more bang for your buck when it comes to buying shares. For those engaged in dollar cost averaging, it is possible to buy more shares of whatever it is you are buying (from index funds to ETFs to individual equities) right now. Later, after the stock market recovers, you could see your holdings increase by quite a bit, because now you have more shares at a higher price. If you have time on your side, today’s down stock market could mean larger gains for you down the road.
For more active traders, a down stock market can also be a great gift — especially one that drops so dramatically. It’s a chance to get in on an investment that has fallen by a large amount in a short time. Then, when the market has a good day (and all the volatility lately means that the market could very well have a good day soon), it is time to sell and take some fairly decent profits. Of course, the flip side of this is the risk that you could see pretty big losses too. In the investing world, bigger profits come with a bigger risk of loss.
Timing: When a Down Stock Market is a Bane
Of course, for those who do not have time on their side, a down stock market is an endless source of worry. For many approaching retirement, the global financial crisis came at a very inconvenient time, forcing many to put off plans for retirement, since their accounts were significantly lower in value. Some of those already in retirement saw the value of their portfolios drop quite a bit, necessitating an adjustment in the rate of withdrawal from accounts. Those forced to take minimum distributions saw some reprieve, but without an extension of that reprieve, there could be trouble for some.
For many, recent events have brought home the importance of diversity in an investment portfolio (especially in a retirement account), as well as the need for income diversity. Relying on a retirement account only for income in retirement may not be the best idea. For those with time on their side, it is a good time to develop alternative income streams so that there is a bit more of a cushion in the event that the stock market falls dramatically when it is their turn to retire.