I’m tempted to withdraw all my money from my investments and place it in a safe place, such as my mattress.
No matter how large a fluctuation in the market may seem, I know that withdrawing my money from the market when my portfolio is on a downward trend is the worst possible thing to do. This is because selling is the only way to ensure that temporary losses will become permanent.
It’s easier to say than do, but staying the course is important. It’s important to know how to stay calm when faced with gloomy financial predictions. Here are some tips on how to stay calm in a scary market.
It’s OK to hide
It’s not always the best idea to bury your head in the ground. This is due to , a cognitive bias which causes us to act in response to our fear. Even if we know it’s counterproductive, we feel that doing something is better than doing nothing. Listening to the action bias, however, is why people tend to sell at the lowest market levels and buy at the highest. They are afraid to do nothing.
It’s almost impossible to ignore the voice that shouts at us, “Do something!” When the market is in decline, it is easier to overcome the action bias by simply ignoring your portfolio.
It doesn’t necessarily mean that you shouldn’t check your portfolio. Obsessively checking your portfolio and consuming financial information on a daily or weekly basis can lead to you making decisions based on fear (or greed) rather than your rational investment strategy.
Plan to regularly check on your investments — every month or quarter. You will be able to make the necessary adjustments to your asset allocation and avoid the action bias. (See also How to Invest Like an Expert — No Financial Advisor Required).
Take comfort in history
The past performance of the stock market is important to consider. Even though the phrase, “past results are no guarantee of future outcomes,” is tattooed in the minds of all financial analysts and stock market analysts, it is still worthwhile to examine the performance of the entire market. You’ll find that the markets are always trending upwards if you look at long-term trends, historical returns and other factors.
It’s not fun to experience short-term volatility and losses, but knowing that the market will eventually recover makes it easier to put them in perspective. Investors who did not panic during the 2000 and 2008 market corrections saw their portfolios grow over time. Even though a decline can be stressful, relying on a sound investment plan and historical market trends will help you to stay the course. You’ll feel more confident and able to get through it.
Plan for volatility
We tend to overreact when we see volatility, because we forget it is a part of the financial markets. We should expect that we will experience several market downturns in our investing careers. We often assume that the markets will continue to rise. Even a small dip can be overwhelming when you have such high expectations.
Create a plan of what you will do in a recession to help counter these expectations and the fear that results when they are not met.
It could be as easy as sticking to a head-in-the sand approach during downturns. If you know in advance that you will reduce the number of times you check your portfolio when things look bleak, you can stick to this plan.
You can be proactive rather than reactive with your plan. You know that downturns in the market are normal. Decide ahead of time what you will do to incorporate them into your investment strategy. You may decide to buy more investments in a downturn rather than fear it.
Don’t panic
We aren’t wired as rational investors. That is why we struggle so much. When we are feeling fearful, our emotions can override rational strategies. Selling your investments due to market volatility or scary headlines can be a long-term solution for a short-term problem.
Before they occur, think about how you will respond to market changes that are frightening. You’ll be less likely to react in fear if you have a plan.
