The stock market has experienced a roller coaster of a year. The S&P 500 is up nearly 50% from this time last year, but when it comes to the stock market, what goes up must come down eventually.
The market can't continue climbing forever, and sooner or later stock prices will take a tumble. When that will happen is anyone's guess, though.
If you notice your portfolio is on a downward trend, it can be tough to determine whether the market as a whole is crashing or if it's just your stocks. However, there are a few things to consider when your investments take a turn for the worse.
1. Check major market indexes
If you're not sure whether the market is crashing or if it's just your individual investments, check some of the major market indexes — like the S&P 500, the Nasdaq, and the Dow Jones Industrial Average.
These indexes represent the stock market as a whole, so if the market is on a downward trajectory, you'll notice that these indexes are falling as well.
You can also gain some insight into how certain areas of the market are performing based on these indexes. The Nasdaq contains mostly tech stocks, the Dow includes only 30 large companies, and the S&P 500 includes 500 companies across a variety of industries.
So, for example, if the Nasdaq falls but the other two indexes aren't as affected, then you'll know it's the tech industry that's experiencing a downturn. On the other hand, if the S&P 500 plummets, then the crash is more widespread and affects a lot of stocks in many different industries.
2. Look for industry news
If you notice particular stocks in your portfolio aren't performing well, do some research to see if you can find out why. Is there any bad publicity surrounding those companies? Did the companies' earnings fall short of what they had anticipated? Did they fail to live up to public expectations somehow?
Keep in mind that just because a company is having a bad moment, that doesn't necessarily make it a bad investment. It's a good idea to try to understand why a certain stock's price is falling, but that doesn't mean you should rush to sell.
If this particular stock is experiencing repeated downturns and is no longer as strong as it used to be, then you may consider selling. But as long as the company's underlying fundamentals are still solid, it's worth riding out the storm.
3. Remember that it doesn't necessarily matter
When your portfolio takes a tumble, it's normal to want to figure out what's going on. But in many cases, it doesn't necessarily matter whether it's your portfolio or the stock market as a whole that's crashing. In either situation, oftentimes your best bet is to leave it alone and wait for things to get better.
As long as you're investing in strong companies, your investments should bounce back. Even the best organizations struggle sometimes, but given enough time, they will recover. If you sell at the first sign of trouble, you could miss out on all the long-term gains.
The same is true about the stock market as a whole. The market has experienced countless downturns, corrections, and crashes over the decades. However, it's managed to recover from every single one.
The stock market is a continuous cycle of ups and downs, but over the long run, it has consistently earned positive average returns. Regardless of whether your portfolio or the market as a whole is crashing, one of the best things you can do is simply wait it out.
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