How to Handle a Stock Market Plunge

Buying low and selling high can be harder than you think. Do it anyway.

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Published March 03, 2020

The stock market was at an all-time high just a couple of weeks ago, buoyed on the tide of a nearly 11-year bull market. But the S&P 500 fell by 12.8 percent from Feb. 19 through Feb. 28. (It recovered a bit on March 2, but who knows what will come over the next few days or months?) A decline of 10 percent is generally considered a correction, while a 20 percent decline is a full-fledged bear. The correction took only six days, making it the fastest market correction ever, and the coronavirus panic is cited as the culprit.

"Worldwide viral pandemics occur on average every 25 to 30 years — long enough for us to lose our memory of how bad they can be and to lower our guard on preparedness,” writes Carolyn McClanahan for Financial Planning. McClanahan is both a doctor and a Certified Financial Planner.

It's important to remember that pandemics, like the diseases themselves, run their course. The coronavirus will also run its course, as will its impact on global markets. If your nerves are currently jangling, try putting this market correction in the same perspective as the bull market. When it comes to markets, neither good nor bad times last forever.

In my mind, the past several trading days are less shocking than going (so far) almost 11 years without a bear market. I've written for years that the bull market won't continue indefinitely and that one should stay the course by sticking to a balanced portfolio — and that boring bonds belong in your portfolio. I've even exposed my own portfolio asset allocation of 45 percent stocks and 55 percent fixed income.

When markets take a dramatic dive or a series of dives, it's easy to start catastrophizing: Will this turn into a bear market or quickly recover? Could this be the beginning of the third market plunge of roughly 50 percent or more over the past two decades? Fact is, I don't know, nor does anyone else.

Here's what I do know ...

Such a protracted bull has lured us into a false sense of market security. Many investors buy high thinking they can take on a ton of risk only to sell after a plunge. Obviously, buying after a plunge and selling after a surge works out far better.

By being disciplined and sticking to an asset allocation you can live with, you'd have to increase your stock allocation a bit now. Buying when stocks have fallen is very simple to do but not so easy emotionally.

Capitalism will survive and stocks are a far better value today than they were a couple weeks ago. I bought some stock index funds on Feb. 28 to rebalance my portfolio. And if stocks continue to plunge, I'll have to buy more again. That is not to say doing so won't be hard, just as it was hard when stocks were down by more than 50 percent in March 2009.

My advice is no different than it was last year. Stick to an asset allocation you can live with. Be honest with yourself. Pull out your brokerage statements from late 2008 and early 2009 to see how you behaved. Did you buy, sell, or do nothing? If you sold, what makes you think you won't do that again?

I tell people picking the overall stock-to-bond allocation is the second most important decision they will make. The most important is making the commitment to stick to it. Hard as it is to sell stocks and stock funds in good times, it's much harder to buy them in bad times.

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