7 Reminders We All Need When the Stock Market Takes a Big Downturn

When you start investing, you may have an idea of how you'll respond to the stock market's highs and lows. 

But, when those negative scenarios you've considered start to turn into a reality, and you're forced to watch as hundreds (and sometimes even thousands) of dollars disappear during a single day of trading, you may start to lose your confidence in the market.

But the prevailing wisdom is that even those really bad days eventually turn around, highlighting the importance of keeping a clear head when stock prices start trending down. 

Keep reading to discover some things that may help to restore your faith in the stock market when things start to get tumultuous.

It's not unusual to see the market lose between 10-20% of its value during a stock market correction. And while a correction is not the same as a recession, it can still make people nervous, especially if they're watching their account balances go up and down in real time.

There have been about 10 of these market corrections over the past two decades, according to investment bank Charles Schwab. And while it may be tempting to sell off those poorly performing stocks during these downturns, it's important to remember that most of those 10 corrections eventually resulted in positive returns for those who stuck it out.

When the stock market drops, that means prices are down and stocks are on sale. Millionaires can be made during stock market drops, because people can buy assets at a lower price, then hold onto them until they go back up.

For example, if a stock is normally around $100 per share, but drops to $75 per share, you are able to buy it for a 25% discount. If you hold onto that stock until it goes back up to $100, you will have made $25 on each share you purchased, solely because you were able to buy at the right time.

Instead of selling off all of your stocks during a downturn, you may want to consider changing which stocks you're holding. Stock markets operate around the globe, and just because one market sector is seeing a downturn, it doesn't mean they all are.

Selling underperforming stocks and reinvesting your funds into different sectors could help you minimize losses during a bear market. It may make more sense to endure small temporary losses, rather than pull out of the market completely and hope that you can jump back in before it goes up again.

It can be easy to get scared after looking at the drop in your portfolio. But, markets fluctuate regularly, and if you get nervous every time there is a drop, you will likely be nervous on a regular basis.

Understanding that movement — both up and down — is a normal part of the investment journey can help you stay calm, even while stocks are dropping lower than normal.

Not all assets are impacted the same when there's a downturn. For example, during the COVID-19 pandemic, many companies in the entertainment and travel sectors were negatively impacted.

At the same time, those holding stock in healthcare related companies saw a huge boost to their returns. Splitting your investments across different categories and asset types could help protect you from experiencing massive losses during a downturn.

Some people will try to time the market in the hopes of making large sums of money in a short amount of time. But, when you look at how the market has historically offered a return of about 10% each year, investing for the long-term can help improve your chances of turning a profit.

Since 1920, most individual investors have seen a positive return after 20 years, which seems to prove that stocks are better viewed as a long-term asset, and better judged after decades of activity as opposed to a few gains or losses.

Even with access to the internet and all of the information it contains, you may still feel like you're out of your depth during a downturn. 

Fortunately, there are pros out there who can help you navigate these scary times and maybe even help you figure out how to take advantage of those lower-priced stocks so that you can build up your portfolio once the market starts picking back up again.

Investing comes with risk, and downward market changes can cause panic and fear in those who don't understand that volatility is part of how the stock market operates. 

That being said, downturns can be a great time to prepare yourself financially so that you can withstand those unfavorable fluctuations that come with investing.

Meeting with a financial advisor can give you greater insight into investing strategies and provide you with a personalized path to achieve your financial goals — regardless of what the market is doing.