Watching the financial news on August 24 and 25th, you might have imagined the U.S. stock market was facing its biggest meltdown since 1929. As the markets slid following news of economic woes in China, you might have even been tempted to sell part of your portfolio to stem your losses.
Yet by the end of the week, stocks had mostly stabilized and rebounded-the Dow Jones Industrial Average, to take one prominent index, ended the week up 1.1% after a mid-week surge.
Welcome to the sometime tumultuous world of market volatility. We all know markets will go up and down, but it can be a tough pill to swallow when you are watching your portfolio drop in value over a succession of days. That sinking feeling may even be more pronounced in an age when you can check your account balance online at a moment’s notice.
So it can be helpful to look at the late August market swings as a type of “fire drill,” and think about how you should respond the next time it happens-as we all know it will, sooner or later.
From the perspective of a week later, here are some lessons we can take from the August 2015 market correction.
Know your mind: Don’t let emotions cloud your investing decisions. When you log on to your account and see your portfolio shedding value in a market correction, you may be tempted to “do something.” And maybe you should-but at least pause to ask yourself WHY you want to take action.
When the market starts looking like a rollercoaster headed downhill, take time to think about your broader investing strategy and long-term goals. Things to consider….
Think you can time the market? It’s tough. Even financial professionals can’t predict exactly what’s going to happen on a day-to-day basis.
Bloomberg View’s Megan McArdle explains:
Attempting to time the market, like most other active trading strategies, produces at best a modest premium that roughly pays for the work needed to generate the excess profits. (At worst, you lose much more in herd behavior and trading fees than you gain in value.) But that’s for people who do this for a living. The odds that you, who have so many other things to think about, are going to wade into the market and outperform the professionals are approximately the same as the odds of you getting up out of your armchair, wandering down to the nearest major league sports arena, and outperforming the folks on the field
Step away from the screen. Some investors swear off financial media during down times, as they find it only makes them more anxious. So if you think you’re prone to anxiety that might lead to rash investing decisions, turn off the cable news and step away from the Internet for a while to clear your head and get a fresh perspective.
Many investing professionals even suggest that if you’re investing for long-term goals like retirement that may be in the distant future, you might be better off not looking at your account balances for a few weeks.
Think long term to keep things in perspective. Particularly if you’re saving for long-term goals like retirement, reacting to short-term market phenomena may run counter to your interests. Taking money out of your portfolio may mean you lock in losses and miss the upswing when the markets recover.
According to Vanguard Group, Inc., one of the largest mutual fund and brokerage providers: “The key to getting through unexpected turbulence is to understand that swings in the financial market are normal-and relatively insignificant over the long haul.”
These lessons hold especially true for younger investors, who have a longer investing time horizon and thus more time to recover from potential short-term losses. None of these lessons are meant to necessarily suggest you should “do nothing” in a market downturn-but keep in mind that doing nothing is an option.
And if you do choose to take action, know WHY you’re taking that action, and think carefully about how it fits into your long-term investment plan.
If you’re in doubt, then it’s a good time to talk to a market expert like a professional investment advisor who can help you consider your options. And yes, he or she may tell you to stay put and let the correction play out.
Remember: Sooner or later, we’ll see another market correction, because market volatility is a fact of life. So it’s a good time to think through how you plan to respond the next time your portfolio dips.
Investing is one of the best roads to take if you’re hoping to grow your net worth in the long-term-but no one ever said it wouldn’t be a bumpy ride from time to time. Recognize that volatility is a fact, and prepare yourself to respond accordingly.