Brian Baker, CFA, Bankrate.com
The shares were sold in early April as investors tackled how tariffs affect inflation and economic growth outlook. Some investors grew worried about the possibility of a recession. Some of the largest tech companies have seen stocks fall over 20%, with Tesla down about 50% from its recent high. The Federal Reserve faces the challenge of whether to cut interest rates at risk of exceeding inflation targets or to raise interest rates at risk of slowing economic growth.
There is concern that the market will fall quickly and the value of portfolios and retirement accounts will decline. However, it is especially important in the market to look at long-term goals. Don’t fall into the trap of thinking you can measure the market. Avoiding this and other misguided movements will help you in the long run.
Working with a financial advisor will help you navigate uncertain economic situations. Bankrate’s Financial Advisor Matching Tools can help you find an advisor in your area.
Avoid making these investment mistakes when the market plunges
1. Don’t become a short-term trader
It’s appealing when you decline to close by ticking the latest news and where the market is trading. Cable news shows are constantly moving prices on screen quickly, allowing you to keep specials every night and discuss where things are heading next. But the truth is that these so-called experts are far better at explaining what happened than what happened.
Remember why you invested in the first place and keep those goals in mind. Many people invest in long-term goals like retirement, but this could still be decades away. Resist the urge to become a short-term trader simply because prices are moving around a lot. Even if you didn’t predict the current sale, don’t think you can predict what will happen next.
2. Don’t chase the recent winners
When the market is declining, it’s natural to think about where you can invest in to avoid the pain you are currently in. However, selling something that has already gone up to buy it is unlikely to become a winning strategy over time. You may feel better in the short term, and you may even make money for a while, but it’s better to stick to the allocation of your chosen portfolio and re-adjust to those allocations as prices change.
Don’t forget that stocks are part of your long-term investment plan and that volatility is expected. Your reward for high volatility processing period is an average return of around 10% over decades, based on the S&P 500.
3. It’s not time to panic and sell everything
It’s not something everyone enjoys seeing their portfolios fall while the market is selling. It triggers an emotional response to see the money we saved up and invested, and appears to have disappeared for hours and days. To prevent your portfolio from diminishing further, you may even have a very strong urge to sell. But that’s a mistake.
Investors who think they can get out of the market until things settle or until uncertainty is less, could miss a recovery. And recovery will become as fast as decline, punishing those who have gone outside and never returned.
Sales are particularly harmful if appropriate appeals are made for a certain period of time. If inventory continues to decline after you sell, you may feel great with your decision. It’s great to see your portfolio stabilise while the market is still selling. But the problem is that you may feel so good that you may not come back, or you are stuck with paying a higher price than you would sell.
Consider consulting with a financial advisor who can help you stick to your long-term investment plan when market volatility is giving you doubt.
4. Don’t always check your portfolio
Following every movement in the market, constantly worrying about your fluctuating portfolio is unlikely to lead to a sound investment decision while selling the market. If you’re always checking, it’s probably a sign that you’re worried, and it could make you more likely to make an emotional decision.
Also, remember that if you participate in a workplace retirement plan, such as a 401(k), you are more likely to adopt a dollar-cost average practice. This approach means reducing stocks when prices are high and buying more stocks when prices are low.
5. Cash is not a place to hide
Cash may seem like an ideal place when the market is free falling, but in reality it is a poor asset to hold as a long-term investment. With inflation still rising, you lose your purchasing power with your traditional savings or checking accounts with money. The Federal Reserve wants long-term inflation to be around 2% per year, so cash is very likely to become less valuable over time.
If you have short-term spending needs, or you are building emergency funds, it makes sense to keep cash to those needs, but when your goals are still decades away, it makes no sense as a big position in your long-term investment portfolio. Holding small portfolios in cash – under 5% – will help you take advantage of the market decline when you come, making it possible to buy at an attractive price. But don’t forget that cash not just sit there, but maximizes its value by being actually invested.
Conclusion
Selling a market can be unsettling and lead to emotional decisions. However, you can avoid making mistakes by slowing down and thinking through your long-term investment plan. Remember that volatility is part of your investment and knowing how to handle it properly will increase your long-term returns and increase your chances of achieving your goals.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Furthermore, investors recommend that past investment products performance is not a guarantee of future price increases.
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