Since April 2nd, the S&P 500 has dropped by 10.5%; and since its recent peak on February 19, it has fallen by 18.4%. How should we react to such significant market drops?

To answer this question, I want you to imagine that you bought all your clothes from Neiman Marcus and they are hanging (or sitting) in your wardrobe. Now imagine that Neiman Marcus announces an across-the-board 30% discount on all of their clothing items. Would you say “Damn, my clothes are now worthless” and sell them all at a flea market? You probably wouldn’t and might even make a trip to Neiman Marcus to buy a piece or two to add to your wardrobe.

Here’s another analogy: say you own two apartments in a city. A pandemic sweeps across your city, and property prices drop by 20%. Should you sell the two apartments you already own at a loss, or should you buy one more to take advantage of the price drop? You would probably buy thinking that owning three apartments is better than owning two.

Your reactions to these two situations should guide your approach to your portfolio when the market has big discounts as it does now. At the end of the day, it’s the number of durable assets you own that will determine your future well-being, not the prices of those assets at a given moment in history. 

Do you remember March 16, 2000? On that day the market dropped 12% in one day. Has that day affected your life now? If it has not, it proves my point. If it has, I’d like to hear from you. (Quite possibly you sold in panic and totally missed the more than 100% rally that came afterward.)

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