Stay calm when the market jitters.
This month’s volatile market sell-off is a reminder of just how delicate the stock market can be. It’s been roughly a decade since U.S. investors have had to deal with a potentially major stock market decline. If the recent stock market sell-off is the beginning of an even larger decline, investors need to be comfortable with their game plan for navigating an extended period of market underperformance. There’s no perfect formula for investing in a down market, but here are seven of the worst decisions investors can make during a market downturn.
They sell everything.
Assuming your portfolio is well-diversified and balanced based on your personal risk tolerance, long-term financial goals and investment time horizon, there’s absolutely no reason to sell your stocks and retreat to cash. Even the most optimistic long-term investor should understand that the stock market doesn’t rise in a straight line. Both the U.S. economy and the stock market are cyclical in nature. According to Guggenheim, the S&P 500 has declined between 5 and 10 percent 78 times since 1945, and it took an average of just one month to return to its previous level.
They panic.
Investment decisions should always be made rationally, not emotionally. It’s difficult not to panic when the market is tanking, but Owen Murray, director of investments for Horizon Advisors, says that for long-term financial plans to work, its critical for investors to stay the course during times of market weakness. “Panic can lead to irrational decisions, such as selling after the worst of the downturn has already occurred,” Murray says. “Selling during a sell-off may feel the like right choice at the time, but it will most likely result in a permanent loss of capital.”
They do too much.
There’s nothing wrong with adjusting or rebalancing your portfolio a bit during a market downturn, but there’s no need to reinvent the wheel. For extremely proactive investors, it may be difficult to sit on your hands and watch your portfolio suffer rather than take action. However, TD Ameritrade chief market strategist JJ Kinahan says the best course of action for long-term investors is often to do very little. “That is, if you have a time frame of two years or more on your investments, this is just a bump in the road,” Kinahan says.
They are too short-sighted.
The worst-case scenario during a stock sell-off is that the S&P 500 might enter a bear market. However, the average U.S. bear market has lasted just 1.4 years. Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, says trying to time the market in the short term is the biggest mistake he sees investors make. “It’s the volatility of the stock market that allows future gains to be made (if you continue to add to your investments), and that allows the stock market to have higher average returns than other asset classes,” Zaccarelli says.
They obsess over the market.
Investors have access to 24 hours of endless stock market media coverage. During times of market downturns, almost all that coverage will be negative. Exposing yourself to hours of negative market news every day can subtly impact your feelings about investing in irrational ways. “I tell clients all the time, ‘No one drives up to your house every day and announces its value to you, and you should treat your stocks the same way,'” says Jamie Cox, managing partner for Harris Financial Group. “Own them for the cash flow and future earnings, and let the price take care of itself.”
They try to ‘catch a falling knife.’
Adding to long-term core portfolio holdings responsibly as prices fall is a perfectly fine approach to a stock market decline, but never try to recoup losses by timing the bottom in some of the worst-performing stocks. This mentality is often referred to as “catching a falling knife.” There’s an old adage on Wall Street about how a stock falls by 90 percent — first it falls 80 percent, then it falls 50 percent. Just because a stock is down big doesn’t mean there’s not significant downside remaining. Trying to time a volatile market is a dangerous game.
They worry about numbers.
Buying or selling stocks based on the price at which you originally bought a stock, attempting to preserve a specific profit level in a portfolio or buying a low-quality stock just because it appears to have a “cheap” share price are three mistakes investors can make during a downturn. It’s natural to try to think about investing in terms of profits, losses and prices, but successful long-term investing is more about traits that are difficult to quantify, such as quality, value, patience, diversify and discipline. “Those that have long-term success think about consistent, realistic returns that minimize risk,” Kinahan says.
In review …
To recap, here are seven mistakes that investors make in a market downturn.
— They sell everything.
— They panic.
— They do too much.
— They are too short-sighted.
— They obsess over the market.
— They try to ‘catch a falling knife.’
— They worry about numbers.
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7 Mistakes Investors Make in a Market Downturn originally appeared on usnews.com
