The Stock Market Will Fall Dramatically (Some Day)

Count on Downturns and Upturns as Part of Market DNA

A stock market fall is inevitable. Getty Images

The unfortunate reality of investing in the stock market is living through the inevitable valleys that occur when the market takes a deep dive.

Nothing chills the bones like watching the market take a tumble because every investor will wonder: "Is this the time it fails to bounce back?"

Of course, no one knows the answer to that question, but history informs us that the stock market does bounce back, although it may be slow in happening.

Every time the stock market stumbles some investors abandon their investment plan and sell out as prices continue to fall.

Long-term investors need the courage to hold on even when the market looks bleakest. I am assuming long-term investors have more than five years before they will need to access their investments. If you are less than five years away from your goal, you should not be heavily invested in stocks.

Ask any stock broker what happens when the market takes a nosedive and almost every one of them will tell you that their phone won't stop ringing from clients who want to cash out of the stock market.

These are the same clients the broker has convinced to adopt a strategy of buying great companies at great prices and holding them while they create wealth.

Money is a very emotional topic and the fear of loss is the strongest emotion of all. It is difficult and painful to watch the value of your portfolio follow market down into what may seem like a bottomless pit.

The first reaction of many investors is to simply sell everything and take their money out of the stock market. That is almost always exactly the wrong thing to do.

How should an investor react when the market is on one of its rollercoaster rides that happen to be pointing down at this point?

For making a decision under any circumstances, the first step is to re-examine the companies you own to verify they still fit into your overall investment plan.

If something has fundamentally changed about the company, for example, they have lost their economic advantage or have become financially unstable, you should seriously consider selling the stock regardless of what the stock market is doing.

One of the few things we know for certain about the stock market is that it will go up and it will go down. However, no one has a clear idea when either of these events is going to happen. The strategy of long-term investing will protect you as much is possible for those times when the stock market is going down and it will create the opportunity for growth when the market is going up.

When you are approaching retirement, it is important to begin moving your money out of stocks and into bonds and cash. This way market rollercoasters will not devastate your assets at a time when you need them most, such as the one that began in 2008 and saw a drop of some 50 percent but rebounded by 2012.

For all other investors, the best strategy after re-evaluating all of the companies and confirming they still meet the qualifications you needed when you bought them, is to remain in the market and let your great companies do what they do best. When the market rebounds, you will be there with your great companies to participate in the recovery.

An old Wall Street saying notes that when the market is falling, you should be buying and when the market is rising, you should be selling.

The wisdom of this saying is obvious, however executing it is very difficult and takes a lot of courage and confidence.

Whether you feel confident to buy into a falling market or not, the key piece of advice is to wait out the downturn by staying in the market.