When the stock market goes through a big drop, it can be difficult to know what to do.
Editor’s Note: On Wednesday afternoon, President Trump imposed a 10% minimum tariff on all U.S. trading partners. For some, it was as high as 46%. Wall Street did not react well to the news. The S&P 500 dropped 4.8%, the Dow declined 4%, and the NASDAQ plunged 6% in Thursday’s trading.
This morning, we woke up to news that China had announced retaliatory tariffs of 34% on all goods from the U.S., sending stocks lower once again.
As the chaos continues, this is a good reminder that markets can behave like manic crowds. When someone yells “fire!” everyone rushes to the exit. So, today I’m running Part 1 of an essay from InvestorPlace CEO Brian Hunt with some relevant advice about what you should do and, more importantly, what you should not do during market selloffs. Stay tuned for Part 2 tomorrow, and I’ll be back in touch with you next week.
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Hello, Reader.
When the stock market goes through a big drop and your portfolio’s value is going lower and lower, it can be difficult to know what to do.
It’s an emotional time, and mistakes are common when we are feeling pressure.
- What about my retirement…?
- My kid’s college education…?
- My dreams of financial independence…?
Well, when the market takes a nosedive there are some things you should do, and also some things you absolutely, positively SHOULD NOT do.
And we can learn a lot by looking at one of the biggest business stories of the past 100 years: Amazon.
If you were asked to name some of the biggest stock market winners of the past century, there’s a good chance Amazon would come to mind.
After all, Amazon has gone from a small online bookseller to one of the world’s largest, most powerful companies. In 2020, the company’s market value reached a massive $1 trillion.
Amazon now sells virtually everything… and its founder, Jeff Bezos, is one of the world’s richest men.
Amazon’s market value has increased more than 120,000% since its IPO in 1997. That kind of gain turns every $10,000 invested into a stunning $12 million.
You probably also know why Amazon achieved such huge success. Its Prime membership program was a big hit. Its mastery of logistics lowered the price of almost everything. Its cloud computing business generated billions of dollars in annual revenue.
What you probably don’t know is what the Dow Jones Industrial Average did on Mar. 4, 2015… or what the Dow did on Oct. 18, 2013… or what the Dow did on ANY specific day of Amazon’s incredible rise.
You also probably don’t know what mortgage rates were on Dec. 12, 2003… or where the Federal Reserve had short-term interest rates set at on Jul. 27, 2011.
That’s because what the stock market and interest rates were doing on those days didn’t amount to a hill of beans compared to what Amazon’s business was doing.
Recessions, bear markets, and stock market corrections made a lot of headlines but proved to be tiny speedbumps on Amazon’s path to success.
What the market did or what made headline news on any specific day is meaningless compared to the power of Amazon’s business model, the massive online shopping trend it rode to success, and the moves its management made.
What really mattered to Amazon shareholders wasn’t the broad market, interest rates, or presidential elections. What really mattered was that Amazon constantly innovated, delivered value to its customers, and outperformed its competition.
The same goes for every innovative, successful company you can think of: Apple. Disney. Starbucks. Google. Tesla. Visa. Home Depot. Nike. Chipotle. Netflix. Hershey. Microsoft. McDonalds. Costco. Airbnb. Lululemon. The list goes on and on and on.
What interest rates or the stock market did during the ascent of these companies didn’t matter at all. Even recessions, bear markets, and stock crashes didn’t matter. Who was president didn’t matter.
What mattered was innovation, massive industry trends, delivering value to customers, and smart business models.
Here’s why this is so important to you as an investor…
If you invest in stocks for the long-term, you are guaranteed to live through bear markets, recessions, and corrections.
These declines – even if they are in the modest 15% range – will scare you.
They will make you question the idea of owning stocks.
If you invest in stocks for the long-term, you’re sure to come across tons of “bearish” news and predictions.
There’s a whole industry of journalists and financial analysts who constantly predict the fall of America, runaway inflation, the next Great Depression, and a host of other calamities.
These folks are born pessimists. No amount of positive things can shake them from thinking things are about to go to hell in a handbasket soon.
And you know what?
We listen to them!
Humans are hardwired to pay close attention to potential dangers.
A hundred thousand years ago, it’s how we survived. Constantly worrying that a tiger or bear could be around the corner was a valuable instinct.
These days, we don’t have much to fear from bears or tigers.
However, our instincts make us pay close attention to potential dangers… both real and imagined. So, our subconscious minds compel us to click on bearish headlines, fixate on disasters, worry about elections, buy magazines with gloomy forecasts on their covers, and fret over 15% stock market corrections.
Or as media insiders like to say, “Fear sells” and, “If it bleeds, it leads.”
I encourage you to let common sense and the facts shape your actions instead of leaving it up to caveman thinking.
You’ll be far more successful investor if you do.
Why do I say that? And what are the facts?
Well, just consider that the stock market has averaged a positive annual return of 10% for the past 100 years. This is because the trend of increasing prosperity that is powered by free markets and free enterprise is one of the strongest trends in human history.
And here’s another important fact…
During the 20th century, stocks appreciated in value by 1,500,000%.
A 1,500,000% return turns every $100 invested into $1.5 million.
But wait…
Wasn’t the 20th century filled with wars and recessions and other awful things?
Yes.
There were two huge world wars, which killed tens of millions of people and devastated large portions of the world.
You also had the Great Depression… the Korean War… the Cuban Missile Crisis… the Watergate scandal … the inflation of the 1970s… the Arab oil embargo… the Vietnam War… and the savings and loan crisis of the 1990s.
You also had more than a dozen recessions and five horrible bear markets.
Despite all these horrible things, U.S. stocks appreciated in value by 1,500,000% during the 20th century.
Despite something bad happening every decade, incredible wealth was created by innovative businesses like Coca-Cola, Ford Motor, Apple, Hershey, Intel, Disney, General Electric, McDonald’s, Proctor & Gamble, Wrigley, Tootsie Roll, Pfizer, Microsoft, Walmart, Starbucks, and thousands of others.
We all know there are problems in America… like debt, poverty, and inequality.
These topics are covered daily in the news. They are the subjects of best-selling books. They have many people paralyzed by fear.
But if you know your history and know how powerful American innovation is, you know this is no cause to sell your stocks and crawl into a hole.
To be continued on tomorrow…
Brian Hunt
CEO, InvestorPlace
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