Just five minutes into trading this morning (Monday), the S&P 500 tanked 7%. The sudden drop prompted a 15-minute trading halt.
The Dow Jones Industrial Average cratered more than 2,000 points (7%) at sessions lows, while the Nasdaq also shed more than 6%. It's the worst single-day drop for U.S. markets since the height of the financial crisis 11 years ago.
With today's drop, we're very close to hitting a bear market in 2020.
A "bear market" is defined as a 20% drop from market highs. The bear market level for the S&P 500 is near 2,700 points. At today's lows, the S&P 500 hit 2,752.
If the markets open down on Tuesday morning, it's very likely we'll hit that bear market line. That's a big deal, since the average bear market lasts 18 months.
The most important thing to remember right now is not to panic. Today, we'll show you how to protect your money.
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First, here's why the markets are selling off so quickly this week. It's no longer just fear over the spread of the coronavirus...
Fears of the spreading coronavirus have hammered the markets for weeks, but today, a collapse in oil prices is accelerating the market's sell-off.
Saudi Arabian officials launched an oil price war with Russia over the weekend, sending crude prices plummeting. On Monday, Brent crude prices tanked 26% to $33.49 per barrel. It was the worst one-day sell-off for oil since 1991.
In an attempt to recapture market share, Saudi Arabia slashed the price of its April oil contracts between $6 and $8.
The surprising announcement sent shockwaves through global markets that were already reeling from coronavirus fears.
While market drops like today's are nauseating, the last thing you want to do is panic.
"The absolute worst thing you can do is make important decisions when you are overly emotional (i.e., are panicking), have incomplete information (we don't know how this mess is going to work out) or haven't fully thought out the moves you're making," Money Morning Founding Editor William Patalon, III, said. "Clearly, the investing masses are freaking out - and I'm talking at all levels, from Wall Street to Main Street. Don't succumb. Keep your cool."
As always, maintaining a disciplined investing approach is crucial.
Here are three steps you can take immediately to protect your money from any additional selling...
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The first step is not to panic-sell all of your investments.
"I've actually seen some folks proclaim that they are 'selling everything,'" Patalon said. They're doing that to avoid possible losses. But here's where the whole 'not-fully-thinking-out-the-moves-you're-making' comes into play. They're selling now to avoid a whipsawing. But what will tell them it's time to reinvest in the market?"
If you're holding stocks you're unsure of or that don't align with your core investing principles, those can be unloaded in favor of safer investments. Think of any stocks that aren't financially stable or aren't part of your long-term strategy.
If you're retiring soon, just retired, or needed to cash out soon, it's best to consult a fiduciary financial advisor who can give you personalized advice.
Second, if you're investing for the long haul, you actually want to increase your exposure to stocks right now. With stock prices dropping, this is your chance to buy in at prices you thought you missed on the way up.
You might want to add funds to your tax-deferred retirement accounts, like your 401(k), especially if you have an opportunity to get employer-matching contributions.
It's also a good time to rebalance your portfolio. If you've been maintaining an 80-20 stock to bond allocation, it's likely out of whack right now. Your bonds are worth more, and your stocks are worth less. Take an hour or so to figure out how much of your bonds to sell to maintain your allocation, then put the proceeds back into your stocks.
One of the best ways to do that is with a lowball order. This is where you submit a Good-Til-Canceled limit order at a price 10% or 20% below the stock's current trading price. Make a list of stocks you wished you owned but thought were too expensive and submit these lowball orders. If they fill, then you've amplified your potential returns.
Third, an immediate solution is to add hedges like gold.
Gold is a safe-haven asset. Investors flock to it when stocks fall. Adding a hedge like gold can offer you stability in times like these.
We like the SPDR Gold Trust ETF (NYSEArca: GLD) as an easy way to own gold without dealing with the hassle of securing gold coins or bars. GLD is up 9% on the year, while stocks are flirting with bear market territory. If the uncertainty continues, expect gold to continue performing well.
Action to Take: It's likely we'll officially enter bear market territory in the coming days. But remember to stay calm and maintain your discipline. With the three steps mentioned above, you can protect your hard-earned money when the rest of the market panics.
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