MARKET PLUNGE: 3 things you should and shouldn't do when the stock market sinks

ByMike Waterhouse WABC logo
Monday, August 24, 2015
Peter Tuchman, foreground right, works with fellow traders on the floor of the New York Stock Exchange, Monday, Aug. 24, 2015.

NEW YORK (WABC) -- Making a change to your investment portfolio is one way to react when there's a sudden change in the stock market - but is that the right thing to do?

We compiled some things you should and shouldn't do when the there's a dip like the one we're seeing Monday.

First off, here's what's causing the plummet, according to Rebecca Jarvis with ABC News':

1. Fears of global economic slowdown, precipitated by China's weakness

2. Fed is on verge of hiking interest rates from 0% for first time in 6 years - what happens when the training wheels come off? (They can't keep rates here forever, and there is also downside to keeping them here too long)

Vanguard, an investment company, provided us with some tips for investors.


1. Don't panic

Know that the market had its share of declines and advances. Keep in mind that your losses are only "on paper" until you cash in your shares. Letting your emotions play a role in your decision making will only lead you to make poor decisions.

2. Don't abandon stocks and bonds

While these types of investments have their ups and downs short-term, over time they provide the highest returns and the greatest protection against inflation of the three primary asset classes, according to Vanguard.

3. Don't make abrupt shifts in your asset allocation

Vanguard said as a general rule, it's not a good idea to make changes to your portfolio allocation when the market is unfavorable. It said such changes are "rarely productive."


1. Ignore the market 'vane'

Don't let the direction of the securities markets dictate your investment strategy. Vanguard encourages investors to instead rely on your own agenda - what's do you want to do over how much time? Use that to develop your investment strategy.

2. Gradually implement your investment decisions

Vanguard said it's often better to invest gradually, making investments and changes to your allocation over time. The company compared large lump-sum investments to gambling.

3. Be balanced

Investors should maintain a balanced portfolio of stocks, bonds, and cash reserves, Vanguard said. For maximum long-term returns stocks make good sense, while bonds offer different degrees of income and principal stability depending on their quality and maturity characteristics. Cash reserves, on the other hand, provide complete principal stability. Vanguard said "today's volatile conditions clearly amplify the merits of a well-diversified portfolio."

Jarvis said it's natural to want to sell in these environments. We always fear, "this time, it could be different." But historically speaking, stocks rise over time.

Those who sold stocks in the Great Recession in 2009 lost half their money, Jarvis reported. Those who waited it out gained everything back in three years, and over the last five years have seen their savings rise 61 percent.

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