Does a 10% drop in the stock market scare you? Emotions lead to bad decisions. Be a smart investor. Understand that markets go up and down and invest only if you have the wherewithal to stay invested while everyone else is panicking.
It’s been a long time, but as we write this the S&P 500 has experienced its first correction since October 2011. A correction is defined as a drop in the market of more than 10%, but less than 20%. That nearly four-year period was the third longest rally without a 10% pullback in the S&P 500’s history. In other words, we were due for a correction. Now that it is here, what should investors do?
Don’t Just Do Something, Stand There!Our first bit of advice comes from Douglas Adams’ classic tale The Hitchhiker’s Guide to the Galaxy, which is “Don’t Panic”. That is rule number one, because panic leads to emotional and often incorrect decisions. This is the behavior that causes the persistent gap between a mutual fund’s performance and the performance of its average investor. Based on the historical data, an investor’s return is often lower than the mutual fund’s actual performance over a period of time. This is due to investors reacting inappropriately to a particular situation, causing them to buy high and sell low. As we know, this is the exact opposite of ideal investor behavior.
Corrections are a natural and healthy part of markets cycles. Historically, corrections occur roughly every two years. Importantly, a correction does not imply that further losses are in store. It could happen, but it will not happen every time.
If you Sell, When Do you Buy?
Taking a Long ViewInvesting in the stock market should be a long-term proposition. In times of market stress it can help to take a step back and look at the big picture. The day-to-day fluctuations of the market can seem huge, but if you look at a longer term chart, those daily moves are mere blips. The market marches upward over time. Not always in a straight line, but it does go up.
Plan, Plan, PlanThe best defense against market panic is to have a plan. Know before you begin investing what your goals are. Develop a plan that helps to achieve those goals. Brace yourself for the inevitable downturns. When they do occur, stick to your plan. Everyone would like to be clever enough to sell out of the stock market in order to avoid a downturn, but timing the market is impossible. Investors are better served when they can avoid getting into and out of the market frequently.
SummaryMarket corrections are never fun, but they are part of investing. Investors should take that into consideration before they invest. Knowing about and planning for corrections before they happen will help ensure that investors do not panic. They can stick with their plan in order to achieve their long-term goals.
Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.
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