What goes up eventually comes down. This unpredictability can make even the most experienced investor worry. If you’re having doubts during a market downturn, here are five strategies for maintaining perspective. They could mean the difference between reaching your financial goals and falling short of them.
1. Consider the big picture.
You might be surprised to hear that the market has dropped 20% every three-and-a-half years or so. That’s based on the unmanaged Dow Jones Industrial Average dating back to 1896.
Having that historical context can strengthen your resolve to stay invested, which can be key to long-term success. After all, pulling out of the market at a high point and buying back in at a low one is almost impossible to do once, let alone a few times.
2. Avoid sudden movements.
A survey by financial research firm DALBAR determined that over the 20 years ended December 31, 2017, the average stock investor’s return trailed that of the broader market by nearly 2% per year, as measured by the Standard & Poor’s 500 Composite Index. Put another way, while the market gained about 7.2% annually the average investor’s portfolio realized only a 5.3% yearly gain. Much of this difference can be attributed to the fact that many investors sold near the bottom of the market and were still on the sidelines when the market improved. Market turnarounds often happen suddenly and unpredictably. Being out of the market when it bounces back can mean missing out on significant return potential.
3. Don’t follow the herd.
Many investors jump on the bandwagon just as the market is peaking. While investing during a downturn may go against your instincts, it’s like buying investments at bargain prices. As markets become less emotionally driven, stocks and bonds generally return to something closer to their average, benefiting those who “buy low.” While regular investing doesn’t ensure you’ll make money, staying invested through market fluctuations and buying additional shares at lower prices when the opportunity presents itself can increase your odds of success.
4. Try to keep emotions in check.
It’s no surprise that our mood drops when the market does. While we recognize that market declines are a reality, that doesn’t make it any easier. And those negative feelings can drive decisions that aren’t in our best interest. According to behavioral economist Dan Ariely in his book “Predictably Irrational,” it’s important to understand the power that emotions can exert over our choices. Knowing that we are prone to making poor decisions when driven by emotion may help prevent us from doing so. In other words, keep calm and stay invested.
5. Stay focused on long-term outcomes.
Tuning out the barrage of financial news can be tough, but fixating on daily or even weekly market returns can lead to rash decisions that ultimately impede long-term success. One strategy for curbing the emotional impact of market volatility is to review the value of your investments only at regularly scheduled times, like when you receive your quarterly statements. Focusing on the long term makes you less likely to make unwise changes in response to day-to-day market swings.