Don't panic when stocks are falling

Invest for the long term and come out ahead

Published: August 24, 2015 02:15 PM

Even before today's stock market plunge—and partial recovery—there was a growing chorus of professionals cautioning individual investors about selling.

Investing is inherently a long-term process and strategic decisions should never be made on singular news or market events. And while we (or anyone else) can't tell you whether stocks will continue to tumble in the weeks ahead, we can safely say that they're still the foundation for any long-term investing strategy.

Even if stocks fall an additional 10 percent next month—they're already down more than 10 percent from their May high—investors in a S&P 500 index fund will earn more than 12 percent annually over the past five years.

Explanations for the current decline center around the sell-off of stocks in China, softening oil prices, and fears the the Federal Reserve will raise rates in September.

But often investors are looking for singular reasons for market declines when, perhaps disappointingly, there often isn't one. Even much larger market crashes, like the 22 percent one-day drop of the October 1987 crash, don't often leave behind a "smoking gun."

Worried about today's stock market plunge?

Tell us why (or why not) below.

What's perhaps more surprising is why this particular sell-off took so long. Stocks haven't been in a correction—in other words, a 10 percent or greater decline from their high water mark—in nearly four years, according to Bespoke Investment Group. That's the third longest such period in history.

And U.S. stock markets have been abnormally calm this year. Market observers note that stock markets haven't been this flat—neither up nor down any appreciable amount—since 1904. So against this placid backdrop after the slow, steady ascent since 2009, even a more modest drop probably would have resulted in trending #blackmonday Twitter hashtags, and more than the usual number of photos of traders with heads in their hands.

—Chris Horymski