To say the market's recent performance has been disappointing would be a considerable understatement. It's been downright nerve-wracking. The Nasdaq Composite(NASDAQINDEX: ^IXIC) has fallen 12% in just three weeks. That's not just a fall into correction territory -- it's the kind of rapid loss that leaves investors worried about what's to come.
Maybe further declines are indeed in the cards. Before you panic, however, there are a few things you'd be wise to do, plus a few things you want to make a point of avoiding. Remaining level-headed might even allow you to emerge from this mess not only unscathed, but perhaps even a little better off.
Don't do these things
1. Don't make any panic-induced decisions
It's easy to remain calm when market conditions are normal, and the market is humming along. When matters do get a bit more raucous and stressful, however, is not the time to be making any sweeping decisions as an investor. Not only are you emotionally charged in a way that might lead you into ill-advised buying or selling, the market itself is struggling to distinguish information that matters from information that doesn't.
While the current volatility may focus your attention on near-term losses, remember the opportunity that exists in the market long term. You don't have to make any major moves immediately. Waiting for the dust to settle a bit ensures any investing decisions you do choose to make happen without fear and panic in the driver's seat.
2. Don't buy beaten-down stocks without the proper perspective
Lots of savvy investors are going bargain-shopping in the midst of this carnage, and rightly so. Many great stocks are suddenly on sale at nice discounts.
Just keep any such purchases in the proper perspective.
Nobody knows if the market's hit bottom yet. If it hasn't, continued marketwide weakness could drag these stocks lower with it. Even if it has reached its low for the time being, the echoes of this correction are likely to keep ringing for weeks, keeping things erratic.
If the investments you make are truly backed by a long-term mindset and confidence, you help yourself by not even watching how your newest investments fare in the near term.
3. Don't try to win it all back as soon as possible
In this same vein, resist the temptation to try to quickly regain what you've lost since mid-February.
That's admittedly easier said than done, but this information might help: Although there are more winning days than losing days for the stock market, the typical daily loss is much bigger than the typical daily gain. That's how corrections like this one tend to materialize so quickly. It took just three weeks for the Nasdaq to enter correction territory, but it'll likely take longer than that for the index to get out of it. Trying to accelerate your recovery with speculative picks or excessive buying and selling could do more harm than good.
4. Don't predict the next recession
While fears of an economic recession are the driving force behind the broad market's current pullback, that doesn't mean one is underway, nor does it mean one is imminent. As one adage cleverly reminds us, the stock market has successfully predicted nine of the last five recessions!
Predicting the direction of the economy is difficult, and navigating it in a way that's actually helpful is even less likely. In most cases, your best bet is to exercise discipline and just ride out the uncertainty with proven, high-quality stocks.
Again, that assumes you're building an all-weather, long-term portfolio.
Do these things instead
There are also some steps you can take at this time to build your confidence moving forward.
1. Do recognize that market downturns aren't unusual, or necessarily foreboding
What's happened since February's high is hardly unheard of. Investors saw a similar 15% setback for the Nasdaq in July of last year, and just a few months later, the index was at a record high. The index also snapped out of a similarly sized pullback in 2023.
That doesn't mean every correction comes to a quick end. Some pullbacks do go on to become bear markets.
Most don't, though. Brokerage firm Charles Schwab crunched the numbers, and it found that only one out of five of the market's more recent corrections turned into a full-blown bear market. Hightower Advisors makes the point a different way, explaining that the S&P 500 goes through at least one correction in 64% of all years, but it only suffers a bear market in 26% of those same years.
2. Do take an honest look in the mirror
Still, these setbacks often remind investors that they're not being as conservative or defensive with their holdings as they thought they were. Or in other words, such sell-offs can expose when you've let down your guard and taken on too much risk.
For perspective, while the Nasdaq is down about 13% from its peak, as of this writing, the Dow Jones Industrial Average(DJINDICES: ^DJI) is only down 8% from its all-time high. The S&P 500(SNPINDEX: ^GSPC) is down 9%. That's no coincidence -- the Nasdaq is the most heavily weighted with the tech sector's fast-growing but volatile stocks.
You cannot change the past, but you can start reshaping your holdings going forward, reworking your portfolio to fit a risk profile that works for your personal situation.
3. Make or update an appropriate allocation plan
Any necessary change to the way you pick stocks and manage your portfolio should start with a written plan. If it has specific goals in mind, so much the better. Even a half-baked plan is better than nothing. As Warren Buffett reminds us, "An idiot with a plan can beat a genius without a plan."
Sell-offs like the one investors are going through now can and do happen on a regular basis. A thorough investment and allocation plan can be your guiding star during these downturns.
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Charles Schwab is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab and recommends the following options: short March 2025 $80 calls on Charles Schwab. The Motley Fool has a disclosure policy.
