The Dow Jones dropped over 1,800 points in two days - here's what to do with your money right now
- The Dow Jones and the S&P 500 have both declined recently, causing anxiety among some investors.
- For the average person investing for retirement, daily market moves don't matter much.
- The best thing you can do for your money is to keep it invested, and perhaps even invest more.
Investing can be a fickle friend.
It's easy to feel good when your 401k balance keeps climbing because stocks are riding high. Or, if you bought bitcoin on a whim before it shot up on a seemingly endless rise last year.
But on days when the market falls (or bitcoin continues to tumble), even the calmest investor can feel a tickle of panic.
On Friday, the Dow Jones Industrial Average fell 666 points, and on Monday it fell again - this time dropping by 1,177 points. The Dow Jones is an index that tracks the stock price of 30 major US companies, such as Apple, McDonald's, and Walmart.
The S&P 500, which tracks 500 of the largest companies in the US, including Amazon, TripAdvisor, and Verizon, was down 7.8% over the last six trading days (the stock market is closed on weekends and certain holidays), according to the New York Times.
Those numbers sound huge, especially to anyone still scarred by the financial crisis. And on an absolute basis, Monday's fall represented the largest single-day drop ever, as shown in the chart below.
The Dow Jones has dropped by way more on a percentage basis
On a percentage basis, it wasn't that impressive. In 1987, the Dow dropped 22.6% in one day. Monday's decline was a paltry 4.6% by comparison. Friday's was only 2.1% - a relatively normal amount.
There are a lot of theories floating around about why the market declined: the tax cuts are working, workers are finally getting raises, interest rates (and inflation) could be be going up. Even robots were blamed. Whatever the reason, stocks and other investments are always on the move.
We don't typically ask ourselves why the market is going up - it's going up because of course it is, the economy is strong, and it will only get better! - but even the slightest decline calls for exhaustive analysis.
Last year was a particularly gentle year for investors, with a nice steady climb. When the stock market is rocky like it's been lately, it's called "volatility," and it's not easy for anyone to stomach.
Regardless of why stocks decline, there's one thing you should always do with your money
Making money with money - which is essentially what investing is - is a special kind of thrill. We've been in what investors call a "bull market" for almost nine years now. It's the second longest stretch of time where we haven't seen at least a 20% drop in the S&P 500, according to CNBC.
Chances are your 401k balance, or your IRA, looked pretty healthy by the end of 2017. Perhaps it lulled you into saving more, and investing more. Just in time for the market to stumble a bit.
But now is not the time to throw in the towel. In fact, many advisers will tell you to "buy the dip" - meaning, take advantage of the declining prices to put more money into the stock market.
You can do that by increasing your 401k contribution, or putting money into an IRA (you can still contribute up to $5,500 for 2017 before April 17). Investing in a target date mutual fund is the easiest way to make sure your investments match your age and financial goals. For example, a target date 2050 fund would work for a 35 -year-old who plans to retire in about 30 years.
Ultimately, daily market moves really don't matter for the average American investor. Investing for retirement is an essential part of reaching your financial goals. Sometimes along the way, the market will go way up. And sometimes, it will go down. It's all part of the process.
You have to be in it for the long haul - through big swings in either direction. Don't slow down, and don't try to time the market. You won't win. The only thing the average investor can do is stay the course.
Lauren Lyons Cole is a certified financial planner and a senior editor at Business Insider.