For many of us, the market declines of the recent past, including the stock market crash of 2008, are becoming faded memories. In the end, those who stayed invested during these difficult times perhaps came out in the best shape.
Market crashes and economic downturns are part of life. As the COVID-19 pandemic showed, market calamity can occur seemingly out of nowhere. What's important is how investors handle that calamity. Do not despair. Do not let emotions such as fear and anxiety drive you to sell rashly into a falling market.
After every decline in history, no matter how severe, investor portfolios tend to recover from their loss in value. Markets begin to stabilize and see positive growth over the long run.
- Downturns Are Followed by Upturns
- In down markets, investors understandably can be overcome by their loss aversion instincts. They think that if they don't sell, they stand to lose more money. However, the decline of portfolio value normally won't last. Prices will go back up.
- If investors sell when the market is down, they will realize an actual loss. A lesson many investors have learned is that if they sit tight and wait for the upturn to come, they won't realize a loss. In fact, they may even see their portfolios gain more value than they had before the downturn.
2. You Can’t Time the Market
- Timing the market is incredibly difficult. Investors who engage in market timing invariably miss some of the best days of the market. Historically, six of the ten best days in the market occurred within two weeks of the ten worst days.
3. The Plan Is to Stay Invested
- Long-term investors with a 20- or 30-year investment time horizon who remain invested despite drops in the market most likely will see a smaller negative effect on their portfolio values than investors who sell during downturns and get back in later.
- The stock market crash of 2008. The market downturn after the Brexit referendum in 2016. These events weren't pretty.
- What's important for long-term investors is staying true to their investment goals and a sound investment strategy. A well-diversified portfolio with a mix of asset classes can keep volatility in check.
- If you keep the focus on your long-term investment strategy, emotions like fear and greed shouldn't affect your course of action. If you contribute a certain amount to your portfolio each month, keep doing that despite market ups and downs!
4. Conclusion
- Having the patience and discipline to stick with your investment strategy is vitally important in successfully managing any portfolio. If you have a long-term investment strategy, you'll be far less likely to follow the panicking herd over the cliff.
- Instead of fear-based selling, use a bear market as an opportunity to buy more. Accumulate shares at deep discounts if possible and allow yourself.
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