The Dow Jones Industrial Average dropped over 2,000 points within a week in February 2018. A few of my friends panicked and asked, “Have you done anything to protect your portfolio from this market crash?” I replied, “I did nothing to change my portfolio. In fact, I didn’t even realize the Dow Jones had dropped over 2,000 points.”
My answer immediately sparked their curiosity to understand what keeps me calm and composed during significant market volatility. They wanted a more detailed answer; clearly, they weren’t satisfied with my brief response. They wanted to know what strategy I use to back up my confidence. Since they were willing to listen, I didn’t mind spending 10 minutes explaining a basic, common-sense approach. To avoid having to explain it again during the next market downturn, I decided to document my answer here so I can easily share it with anyone who asks me the same question when the Dow Jones or S&P 500 experiences a major drop in the future. If you’re interested in learning more, keep reading—you might find something helpful!
A Long-Term Investor Doesn’t Panic During a Market Crash
You shouldn’t behave any differently during a market decline than you would during a market bubble. Investing in stocks is quite simple: it’s about owning businesses. For me, that means being an investor in the U.S. total stock market index fund, which represents a fair share of all publicly traded companies in the U.S. and lets capitalism do its work. Historically, these companies grow at around 7% per year on average and pay dividends of about 1 to 2%, which over time can make you a winner. Look at the historical chart of the Dow Jones Industrial Average: while there are many declines, the long-term trend has consistently been upward.
If you imagine the steady line of growth over time, you’ll notice that, despite short-term fluctuations, the line keeps moving upward. Since we’re not smart enough to sell at the peak or buy at the bottom, it’s best to stay the course and hang on through the ups and downs. If you’re trying to accumulate wealth for retirement, the key is to continue contributing to a U.S. total stock market index fund every month without attempting to time the market. Trust me, by the time you reach age 60, you’ll likely have more money than you could have imagined.
Time is Your Best Asset
To build wealth over time, consider the power of compounding. With an average return of 7%, your money doubles roughly every 10 years. It doubles again and again, and by retirement age, it could be multiplied many times over. Start early, stick to a long-term plan, and let compounding work its magic. It’s a mathematical fact—remarkable!
Speculation is a Poor Wealth-Building Strategy
Learn to be a long-term investor rather than a speculative one. In our capitalistic system, market participation should focus on investment, not speculation. Speculation is often a losing game for investors, with Wall Street as the winner. Financial institutions make billions each year in fees and commissions, which means investors collectively lose that amount when trying to time the market.
The Media and Financial Institutions Are Not on Your Side
Media outlets and financial institutions are not trying to give you sound financial advice—they are trying to sell advertisements, encourage frequent trading, and promote high-cost mutual funds. It’s not in their best interest for you to feel calm and settled, and it’s certainly not in Wall Street’s best interest either. Financial companies profit from people making frequent trades and attempting to time the market. Ignore the noise, stick to your long-term investment plan, and stay focused, regardless of fear or greed.