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WalletPrep worksheet · Investing

What should you do when the stock market drops?

Name ____________________ Date __________

Key ideas

  1. A loss is permanent only when you sell. Until you sell, you still own the same number of shares. They are just priced lower for now.
  2. Money for the next 5 years stays out. Cash you need soon belongs in insured savings, so a drop never forces you to sell stocks at a low price.
  3. Regular contributions buy more shares when prices fall. The same $300 buys 4 shares at $75 but only 3 at $100. Stopping contributions during a drop gives that up.

Vocabulary

Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.
Index fund
A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
Bond
A loan you make to a government or company. It pays you interest and returns your money on a set date, called the maturity date.
Rebalancing
Moving your investments back to the mix of stocks, bonds and cash you chose, after market moves have pushed it off target.
Bear market
A fall of 20% or more in stock prices from a recent high. A smaller fall of 10% or more is usually called a correction.

Work it out

Priya owns 200 shares of a stock index fund at $100 each. The price falls 25% to $75 and stays there for 6 months. She keeps investing $300 a month.

  1. Value before the drop
  2. 25% drop
  3. Value after the drop
  4. 6 months of $300 buys
  5. Value at the low
  6. Shares she now owns
  7. If the price returns to $100
  8. Total she put in
  9. Ahead of what she put in

Check yourself

  1. Your fund falls from $50 to $40 a share. How many shares does $400 buy now, compared with before?

    • A. 8 now, 10 before
    • B. 10 now, 8 before
    • C. 10 now, 10 before
    • D. 4 now, 5 before

  2. When does a stock market drop become a permanent loss for you?

    • A. When the news calls it a crash
    • B. When your balance falls 20%
    • C. When you sell at the lower price
    • D. At the end of the calendar year

  3. Which money should not be invested in stocks?

    • A. Retirement savings 30 years away
    • B. A down payment you plan to make in 18 months
    • C. A Roth IRA for a 25-year-old
    • D. Your 401(k) contributions

Your turn

Write down each investment account and the year you expect to need that money. Move anything needed within the next 2 years to insured savings. Then confirm your automatic contributions are still on, and close the app.

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Answer key

What should you do when the stock market drops?

Work it out

  1. Value before the drop$20,000
  2. 25% drop− $5,000
  3. Value after the drop= $15,000
  4. 6 months of $300 buys$1,800
  5. Value at the low= $16,800
  6. Shares she now owns224
  7. If the price returns to $100$22,400
  8. Total she put in− $21,800
  9. Ahead of what she put in= $600
  1. The drop takes 200 × $100 = $20,000 down to 200 × $75 = $15,000. If she sells now, the $5,000 loss is real.
  2. She keeps going. $300 a month at $75 buys 4 shares, so 6 months adds 24 shares for $1,800. She owns 224 shares.
  3. This assumes the price later returns to $100, which is not promised. Then 224 × $100 = $22,400, which is $600 more than the $21,800 she put in.

Check yourself

  1. B. 10 now, 8 before $400 ÷ $40 = 10 shares now, versus $400 ÷ $50 = 8 shares before. Regular contributions buy more shares when prices are lower.
  2. C. When you sell at the lower price Until you sell, you own the same shares at a lower price. Selling turns the paper loss into a real one.
  3. B. A down payment you plan to make in 18 months Money you need within about 5 years could be caught by a drop right before you need it. Keep it in insured savings or similar.