Nothing, unless your financial and investment plan calls for action.
Too often, people become concerned with short-term market fluctuations and allow their fear to push them to make irrational investment decisions. Largely, I believe this is due to the irresponsible actions of the media playing up market movements and their significance. The media’s job is to entertain and sell ads, not provide prudent advice. Sure, the market volatility of the past week could be the beginning of a much larger market downturn, but it also might not be.
These things have happened plenty of times before and the market has kept on reaching new highs despite the short-term blips. We have to expect at least some market volatility every year. Not all days will be good days. Most years, the market experiences a 10% intra-year decline. However, on average, the market is up at the end of the year despite that decline. If you sold every time the market went down 10%, then you’d end up missing out on most of the market’s gains.
Take Advantage of Discounts
Those who invest periodically, such as making payroll contributions to a retirement account, can actually benefit from the markets going down because they are able to buy in at a many different price points. Buying in at lower price points as the market goes down means that you will experience larger gains as the markets begin to rise again.
Historically, bull markets have lasted much longer than bear markets. In fact, bull markets have historically lasted over 3 times longer than bear markets. This means that if you stay invested as markets go down, and continue to make additional periodic investments, then you will reap significantly more gains than if you were to sell out at the first sign of volatility and buy back in once things were getting better. You would have missed the opportunities to buy stocks when they were cheap by doing this. You have 3 times less amount of time to buy in at discounts than you do to buy in at higher prices. Take advantage of the discounts when they come.
Remember the old saying, “Buy low, sell high”?
No matter what age you are or where you are in your life cycle, if your portfolio is allocated properly based on a realistic financial plan and Monte Carlo analysis, then stock market volatility shouldn’t cause worry. Market downturns can be a time for you to buy at a discount among all-time highs. Whether you’re a 20-something just beginning your career and investing or you’re a 75-year-old in retirement, a proper portfolio allocation based on your age, goals, and risk tolerance will allow you to take advantage of market corrections.
Don’t Let Fear Guide You
Those who let the fear of the Great Recession push them to sell out of stocks and who were too afraid to buy back in have lost out on huge returns in the US equity markets since 2009. One of the worst things that you can do for your portfolio (and your wealth/financial independence/heirs) is to sell out at the wrong time.
While you think you may know that the market is going to crash, the truth is that you don’t know and neither does anyone else. The markets could go through a week of losses only to go on to reach new all-time highs a month later. Or, they could continue on a downward spiral. The thing is that there’s no way to know exactly what will happen and there’s a myriad of evidence to support that attempting to time the market is a loser’s strategy.
Use Investing Rules
Discipline is the key to success in investing. Create rules that govern when you will trade your accounts and don’t deviate. This strategy helps to take the emotion out of something that is very emotional – investing your hard-earned money. You can set a specific time that you will revisit your accounts to trade them such as a specific day of the year or every 6 months, or you can set allocation thresholds which tell you when it’s time to trade your account.
For example, if the equity allocation of your account increases above 5% of your target, then you would sell the extra equities at a high point and buy bonds at a low point.
My Question to You
I wonder if as many people pay attention to the financial markets on a day-to-day basis as what financial planners think they do. Does writing an article like this draw more attention to these types of things than if you wouldn’t have read this? Would you have even known that the market was going through a rough patch over the past week if I didn’t point it out?
Let me know your thoughts.
