Monday's Market Sell-Off Has Investors Rattled. Is the Sky Really Falling?

While many of my friends have disconnected from the platform formerly known as Twitter, I've remained on -- because I still run across informative or amusing content regularly. It can be especially fruitful when there are big stories in the news -- as happened on Monday, when the S&P 500 fell by 3%, its worst drop since 2022.

On that day, I ran across a tweet that offered an excellent perspective on what was happening in the market.

Image source: Getty Images.

The tweet

Here's the tweet, from Matt Paulson (@MattPaulsonSD)

Oh no! The assets I don't plan on touching for 20-30 years are worth 2% less than they were yesterday. The sky is falling!

Before I offer any other thoughts, I will concede that such market drops can be very unsettling, especially if you're a relatively new investor and haven't experienced one before. It can be unsettling even if you're a very experienced investor. Imagine that you've been investing for 30 years and your portfolio has grown to $2.5 million. That's great! But if it gets a 3% haircut on a day like Aug. 5, you'd be down $75,000 in a single day!

Put market drops, corrections, and crashes in perspective

If you find yourself hyperventilating at the thought of a 3% market drop, stop. Take a deep breath, and remind yourself of a few other market truths:

• First of all, none of us should invest money we'll need within five years (or maybe even 10, depending on your goals), because you never know what the market will do from day to day or even year to year. You don't want to be planning to sell on, say, Aug. 6, and then finding your portfolio down sharply on the 5th. Put short-term dollars in short-term investments .
• If you're investing with a long time horizon, what happens today doesn't matter all that much, as Mr. Paulson suggested. Your stock market profits will depend on the prices at which you bought and the prices at which you sell -- and you might not actually need to sell for years.
• Focus on percentages, not points. The media will often focus on points, because bigger numbers are more eye-catching: "Dow crashes 1,034 points!" But in context, while the Dow did drop by 1,034 points on Aug. 5, that took it down to 38,703. It's not like it was cut in half -- the drop was actually 2.6%. That's far larger than the typical day's rise or fall, but it's not unheard of.
• For more context, look at how the market has performed beyond just that one day. For example, the S&P 500 was up about 12.7% year to date before Aug. 5, and at the end of that day, it was still up -- by 9.3%.
• The market might drop more today, tomorrow, and other days. We don't know what it will do -- which is why it's not smart to try to time the market .

A healthy investor mindset

To position yourself for more success and less stress in the stock market, develop a healthy and rational mindset about it. Understand that the stock market can be volatile and that market crashes happen now and then. They often don't last that long, though, and the market has always recovered from them and gone on to set new highs. Over many decades, the stock market (as measured by the S&P 500 ) has averaged annual returns close to 10% .

Many savvy investors with a long-term focus will actually welcome a market drop -- because it will deliver more bargains to snap up. This is why it can be smart to keep a portion of your portfolio in cash -- maybe up to 5% or so -- so that you're able to pounce on great opportunities.

Consider, for example, that on Aug. 5, all of the all " Magnificent Seven " stocks experienced significant decreases in their prices:

So keep Mr. Paulson's tweet in mind: "Oh no! The assets I don't plan on touching for 20-30 years are worth 2% less than they were yesterday. The sky is falling!" The sky is certainly not falling, and if you don't plan to sell out of your stocks for five, 10, 20, or 30 years, what happens on Aug. 5, 2024, isn't that important .

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Selena Maranjian has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .