Rising trade tensions with China sent the stock market tumbling Wednesday, with the Dow Jones Industrial Average down more than 3% for the month.
But investors can relax, for now — a few days of bad news is no reason to panic.
While it can be unsettling to see drastic drops after the markets trended upward for so long, young investors can think of the past few days as a buying opportunity, Ashley Folkes, a Phoenix-based certified financial planner, tells CNBC Make It.
When stock prices go down, investors are effectively getting the "sale" price, says Folkes, which in turn makes compounding returns even more powerful over the ensuing decades. You could increase your 401(k) contribution for a pay period (assuming you have enough to cover your living expenses) or add a bit more to your IRA.
That said, for most savers, the best course of action is to do nothing. Don't panic, don't try to time the market and don't be over confident. And definitely don't start shoveling money into the market that you will need for short-term expenses in less than five years, Linda Rogers, a San Diego-based certified financial planner, tells CNBC Make It.
If you have a financial plan, stick to it. No matter what the market is doing. "Nobody can consistently time the market," says Rogers.
Rather, she encourages young investors to "assign an objective to every pot of money they have," and stick to it no matter the market conditions.
"If one pot of money is to fund retirement in 30 years, then you should continue [investing] consistently into the stock market," she says. "You have plenty of time for the market to recover if there is a correction, and you need your money to compound and keep up with inflation long-term." On the other hand, if you have a pot of short-term money — say, for a house purchase — keep it in a high-yield savings account.
Time in the markets is much more important to the health of an investor's portfolio than timing the market. Think long term, not day to day.
"Market timing is incredibly challenging as the best and worst days often happen close to one another," says a Vanguard spokesperson. "In many cases, timing the market for reentry simply results in selling low and buying high."
Reassess your asset allocation
For older investors — say, 40 to 50-plus — the key is to not panic sell when stocks seem to keep decreasing. If you're really worried about what a market correction could be doing to your portfolio, then it's time to reevaluate your asset allocation, or your exposure to domestic and international stocks and bonds, and make sure it reflects your actual risk tolerance.
It's better to re-evaluate during a calm period than amidst the current uncertainty, but if your stomach drops every time the market does, it's probably best to rebalance your portfolio, notes Vanguard. Consider increasing your international exposure.
"Get comfortable with your allocation and you may be able to ward off any impulse to sell after markets have already fallen or buy after they've already risen," Vanguard notes on its blog. "You can't control what happens half a world away while you sleep. But if you have an asset allocation that you can remain committed to, you're very much in control."
And if you need to do something, take some time to research the fees you're paying on your investments. They likely eat up a more substantial portion of your returns over the long run than a one-day drop in the stock market.
Better yet, take a break from the news cycle.The stock market might be dropping today, but historically it always gone back up. The average annualized total return for the S&P 500 over the past 90 years is 9.8%, though past results are not a guarantee of future gains.
"There's an old adage of never checking your account when stocks are tanking," says the Vanguard spokesperson. "It's smart advice; making a decision based on a recent market event usually results in a mistake."
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