Staying the Course
What goes up eventually comes down. This unpredictability can make even the most experienced investor worry. If you’re having doubts during a downturn, here’s a guide to maintaining perspective. It could mean the difference between reaching your financial goals and falling short of them.
When the market dips, follow these six steps:
Consider the Big Picture
Most investors may 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 1900.
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 the bottom is almost impossible to do once, let alone a number of times during your life as an investor.
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 as measured by the Standard & Poor’s 500 Composite Index by nearly 2% per year. 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 stayed on the sidelines — missing some of the market’s best days. Market turnarounds often happen suddenly and unpredictably. Being out of the market when it bounces back can rob investors of significant return potential over extended periods.
Don’t Follow the Herd
Investing during a downturn may go against your instincts. However, stock and bond funds have been a good way to meet long-term financial objectives, and purchasing shares during a decline is like buying investments at bargain prices. As markets become less emotionally driven, stocks and bonds generally return to something closer to their average, so investors who “buy on the dip” can benefit.
While regular investing doesn’t ensure you’ll make money, staying the course through market fluctuations and buying additional shares at lower prices when the opportunity presents itself can increase your portfolio’s ability to provide income.
Get a Grip on Your Emotions
It’s no surprise that our mood drops when the market does. While we recognize that market declines are a reality, we are still susceptible to letting the feelings that accompany those downturns 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 gripped by intense emotion may help prevent us from doing so. In other words, keep calm and stay invested.
In an age of constant connectivity, tuning out financial news can be tough. But fixating on daily or even weekly market returns can lead to rash decisions that ultimately impede our 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. Many investors do so quarterly, when they receive account or brokerage statements. Focusing on the long term makes you less likely to make constant changes in response to day-to-day market swings.
Speak With a Professional
You wouldn’t set out on a Himalayan trek without enlisting a guide who understands how to navigate the most perilous stretches. The same is true of investing.
Your financial professional can be a steadying presence when markets are on a rollercoaster. Maintaining open lines of communication can prevent you from taking steps that could throw you off track and undermine your investment goals. Talk to your advisor about creating a financial plan that can weather various market conditions.