The Right Time to Panic

The S&P 500, a leading stock market index of 500 of America’s biggest companies, plunged below 700 in early 2009 during a major financial crisis. It ended the year with a 26 percent gain, though. There have been five more years with doubledigit gains since then, and it looks like 2017 will be a sixth, with the S&P 500 recently near 2,700. That has some worrying that the stock market is due to fall.

The stock market is likely to retreat sharply one of these days. We just don’t know when. It might be tomorrow, or it might be in several years. Savvy investors expect occasional drops, and they don’t panic and sell during downturns. It’s often best to just wait, or even to buy, when the market heads south.

Sometimes it does make sense to panic, though — such as:

• When you don’t know why you own what you own. If you can’t recall why you bought shares of Typewriterland Inc. (Ticker: QWERTY), you’ll have trouble determining when to sell. If QWERTY shares plunge, it might be due to a fleeting problem, in which case you should hang on, or it might be due to some serious trouble. Be familiar with your holdings so you can tell the difference.

• When you have a short time horizon. If you’re invested in stocks for just a few months, then go ahead and hyperventilate if the market tanks. Anything can happen in the short term. Even stock in wonderful companies can temporarily plunge. Any money you expect to need within the next five (if not 10) years should be out of stocks and perhaps in CDs or money market funds.

Don’t panic just because the market drops, say, 100 points. Remember that it’s the percentage of the market drop that counts, not the points. A 100-point drop was a big deal when the Dow Jones Industrial Average was at 1,000. But when it’s around 25,000, 100 points is less than 1 percent. Keep learning about investing at

fool.com and elsewhere. The more you know, the less you’ll panic.