The Shanghai stock market lost more than a quarter of its value in ten days in late August 2015 (and more than 40% over the summer). This is a major crash for Chinese investors who had not diversified internationally (or Westerners who had bet everything on China). But other exchanges fared rather better. The S&P 500 lost 11% in a week, between Tuesdays 18th and 25th August, and the Euro­Stoxx 50 index lost 13% in late August. Overall global stock markets lost about 10% (MSCI World index). This is not a crash, but simply a market correction (a small drop in prices). Such corrections are frequent (there is on average one per year).

How bad is it?

I must first point out that these are drops from peak to bottom. Two days later, the loss of the S&P 500 was half as deep for example. The numbers trumpetted by the media regarding stock price drops are the biggest numbers possible, not the most significant.

Remember also that you do not have all your money in stocks. If the stock market loses 10%, you will not lose 10%. You must look at what is happening to your investments as a whole, not to a single component. If you invested €10 000 half in stocks, you will lose 10% of 50% of €10 000, or €500 (and a few weeks later, the market will have rallied a little and your loss may be halved).

In addition, these small price falls will not have major consequences in the long term. If you invest your money for retirement, over twenty or thirty years, a fall of a dozen percent along the way will not prevent you from retiring on time. When one says that shares return about 6% a year in terms of purchasing power on average (before fees and taxes), this includes the price falls; so the rest of the time the stock market gains more than 6%, and all in all the annual average is 6%.

What you can concretely do

If this is your first time investing money in stocks, any loss (even just a few hundred euros) always feels weird — it's not something that happens to you with savings accounts or bonds. If this loss of €500 in my example scares you and may cause you to withdraw from the stock market, here are two tips for you.

First, stop checking your portfolio every five minutes (leave that for your phone). If you look less often, you will not see extreme values. Instead of seeing how much you lost from the highest to the lowest points, you will only see the difference between fairly high and fairly low; and as price fluctuations can be quite quick, it can easily divide the losses in half. The less you look at the prices, the less you may see losses. The 40% fall of the Chinese stock market even becomes a gain of 30% over one year (September 2014 to August 2015).

Another concrete tactic is to avoid investing too much money in stocks initially. If you have twenty or thirty years ahead of you, you can easily dedicate a year to warming up. Instead of directly investing 60 or 70% of your money in shares, you can put 10% initially, and an additional 10% a month or two later, to add 10% again later, and so on. By investinging an extra 10% every other month, you will have 60% in stocks after a year. When the market drops, it makes you lose only, say, 10% of 30% of €10 000, or €300 (a loss that will probably quickly drop to 100 or 200 euros). It's like a vaccine: the day you lose more, you will be less impressed because you will already be accustomed to price falls.

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