With the S&P down 2.7% on Friday, I figured it'd be a good time to jump in again with a note about what to do when the market goes down.
First I'll note that if you're reading this blog, I'm assuming that you take a long term view to the markets, i.e. you are not a swing trader, day trader, or really any type of trader.
That said, the thing to remember is that market declines are just part of investing. If you're caring for a flowering plant, you get to enjoy the beauty of the flowers while they're around. After a while, the flowers inevitably die off. Instead of freaking out that the flowers are dead and digging up the plant, the good gardener will pinch off the dead flowers, knowing that the plant needs some period of dormancy to recharge, grow, and hopefully produce an even more impressive display the next time.
Hope I didn't lose you there (I love the analogies). Anyway, the point is that this isn't the time to chuck all your stocks and give up on investing.
Last I checked, the S&P, Dow, and Nasdaq are down 7.9%, 6.7%, and 7.8%, respectively, from their highs for the year. Ideally, I'd like to see the market ease even a little more before I got interested in a big shopping trip. The way it looks right now, it seems very possible that I will get that.
In any case, the thing to be doing now is reviewing your watch list and picking out your favorite stocks from there. If the market continues to slide, it's the perfect time to swoop in on some of those stocks that you really like, but just thought were a little too pricey. While stocks like Home Depot (NYSE:HD) or USG (NYSE:USG) have exposure to the housing market and may take more time to recover, if other high quality stocks like a Coach (COH), Coca-Cola (NYSE:KO), or Johnson and Johnson (NYSE:JNJ) sag with the market it could present a good buying opportunity.
Also don't forget to keep an eye on the stocks you already own. A market decline is also a good time to buy more of a stock you already own if it gets cheaper.
And if you need a reminder on why you stay in the market, be sure to take a look at a long term chart of the S&P 500.
As you look at the chart, you can notice the downward blips where the market declined, but the big picture is that on the whole the line continues moving up and to the right.
Disclosure: Average Joe owns USG stock in his personal portfolio.