BUSINESS
PERSONAL WEALTH HEALTH
RIDE THE WAVES
STOCK MARKET VOLATILITY HAPPENS; REACT ACCORDINGLY
WILLIAM J. LYNOTT
WHEN THE stock market goes into a serious correction and prices fall, many investors tend to panic. Conversely, when things are humming on Wall Street and prices are hovering at their highs, those same investors can’t wait to get in on the action. The result for those investors (some experts tell us, most investors) is the costly mistake of selling low and buying high. That, of course, is the precise opposite of the path followed by the most successful investors: buying low and selling high.
So what should you do during a market correction? Perhaps, say many financial professionals, nothing. For those of us who find that unnerving when stocks are taking a nose-dive, here are some useful tips:
CHECK THE HISTORY BOOKS
The long history of equity investing is peppered with major and minor corrections. In less than 100 years, starting with the major market crash of 1929 to the real estate “bubble” crash of 2008, to the recent Chinese economy correction starting in June 2015, there have been no less than a dozen significant market corrections. Every one of those has been followed by rebounds that led to new market highs, except for the September correction, which hasn’t yet had the time to follow suit.
Clearly, history is on the side of those who say stick to your own investment plan by sitting tight during a market correction. Of course, it’s important that you have a plan of your own, including a well-diversified portfolio, to benefit fully.
CONTROL EMOTIONAL REACTIONS
Constant checking of stock prices during a market decline coupled with exposure to doomsayers’ market predictions is sure to rattle you more than it should. When emotions dominate our decision-making process, good judgement is certain to suffer.
Successful investors have learned that they must make a special effort to prevent emotions from unduly influencing investment decisions, particularly sell decisions. Perhaps the best way to accomplish this is to break the habit of agonizing over daily fluctuations in market prices.
MAKE IT WORK FOR YOU
Once you come to terms with the fact that market volatility and periodic market corrections are inevitable and normal, it’s time to put that knowledge to work for and not against you.
Continue to invest on a regular and planned basis regardless of fluctuations in market prices. Participate in an automatic investment plan, such as an IRA or 401(k), a target date mutual fund or some variation of your own plan for regular investing. Remember: The more you invest when market prices are down, the more you will benefit when prices rebound.
INACTION IS THE BEST POLICY
While there is no guaranteed formula for optimum success in managing your investment portfolio during market downturns, the evidence strongly suggests that the best plan of action for most investors is a plan of inaction. OM
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax advisor for advice regarding your particular situation.
![]() | MR. LYNOTT is a freelance writer who specializes in business management and personal and business finance. Visit www.blynott.com, or to comment on this article, visit tinyurl.com/OMcomment. |