Some weeks ago, the market took a big dip. Some analysts claimed it was the beginning of another huge crash, while others predicted that it was a road bump and nothing more. With so many competing opinions from experts, many investors were scared about their financial standing and sought answers to alleviate their fears.
Here's the truth: no one has a crystal ball. No one has ability to see into the future. As a result, the stock market can surprise experts and amateurs alike. The market can be a highly volatile place, but that doesn't mean that there's cause for alarm every time the market takes a hit.
Weathering the Storm
The market gets a bad rap sometimes. Investors hear phrases such as “1000-point drop” or “Dow plummets to one-month low,” and all we picture is the doom and gloom of days like Black Friday. On a psychological level, we tend to have more emotional reactions to losses than gains, so even the slightest drop drives our minds to the extremes.
The market will always be unpredictable. However, there are several solid approaches we can use to address market volatility and still give ourselves and our families the best chance at a secure economic future. Sometimes, getting through a big storm just involves hunkering down and waiting it out.
Forget Those Fears
When a market takes a big hit, it's human nature to want to minimize any losses. Many of us see big red numbers and want to give in to those impulses to sell off declining stocks. However, panicking over losses is rarely the right move. Instead, understanding your risk tolerance and the timeline of your investment portfolio will help minimize any emotional investing decisions. The general market has largely increased in value over time, though obviously this does not make any guarantees for the future. An article published on Investopedia explains it well:
“There is an old saying on Wall Street: 'The Dow climbs a wall of worry.’ In other words, over time the Dow has continued to rise, despite economic woes, terrorism and countless other calamities.”
Seeing large single-day losses can set off alarm bells in our brains, but we are often best served by not letting our emotions influence our investing behavior.
Trusting the Long Term
Did you know that even the world's worst market timer would have outperformed a non-investor over the 20-year period from 1993 to 2012, as explored in this post from A Wealth of Common Sense? Even more surprising, the world's worst market timer would have out performed a non-investor in almost every twenty-year window since 1926. That's an important reminder that in the past even those who have invested at inopportune times generally saw their investments rise, given a long enough time frame.
In this ultra-connected, digital world it can be tempting to check the market constantly. Put the tablet down. Close that browser window! Resist the urge to keep your finger constantly on the pulse of the market. You’re punishing yourself, spiking your stress level, and likely decreasing your confidence in your investments. Dan Caplinger, a writer and tax attorney, notes in an article for Daily Finance,
“On average, stock prices fall roughly 50 percent of the time in any given day… But the general upward trend of the market means that if you check less frequently, not only do you get bad news less often, you'll get it a smaller percentage of the time.”
Understand Your Investing Purpose
Some people see a downturn in the market as a chance to make a large amount of money quickly. They try to take advantage of investing patterns, game the market, and come out richer on the upswing.
Accumulating wealth doesn't happen overnight by gaming the market. Leaving a legacy involves patience and self-discipline. Your investment strategies and money management should come down to the ability to take care of yourself and your loved ones. When we keep this idea in mind, we're less prone to making impulsive or reactionary investing decisions and allow our nest egg to grow over time.
The Sun Will Come Out Again
Market downturns can be scary. Seeing big dips in the market, flashing red numbers, grim news reports — all of these things tempt us into making rash, emotional decisions to try to minimize our losses. However, if we're able to keep calm and remember our long-term investing goals, we can ensure that a well-balanced portfolio is working to help us reach our goals. When the storm passes, you and your family will have plenty of sunny days ahead.
How do you stay calm and avoid making impulsive decisions during a market downturn? Join the conversation by tweeting @Lindsey2Wealth!