Has the Dow’s wild, up-and-down swings got you rattled? Stay calm, keep the panic to a minimum and stick to your plan. That’s the only way to dodge the most common portfolio-busting blunders.
Don’t be embarrassed to admit that the two-day, 1,400-point drop in the Dow Jones industrial average last week had you fearing the worst. It’s OK to confess you replayed the horror movie “Return of the 2008 Financial Crisis” in your head.
It’s also fine to acknowledge that the Dow’s stunning rebound of almost 550 points Tuesday and the blue-chip average’s ability to bounce back from a 300-point slide Wednesday to finish down just 92 points added to your state of confusion.
Sure, these are anxious times. But angst – and uncertainty – come with the territory when you invest in stocks for long-term goals such as college tuition and a secure retirement.
The key to successful investing is avoiding critical mistakes that can derail your future plans. While some investors fear rising interest rates and trade disputes could continue to roil markets, others note that the economy and job market are still strong, providing support for stocks.
Here are the most common, and costly, errors to avoid when the stock market gets rough:
Letting fear take hold
Not controlling your emotions can lead you to overreact to short-term market drops. You could do things you may regret later, such as dumping all your shares just before the market begins a rebound.
“The first instinct when stocks are causing you pain is to want to get rid of the pain. And a way to do that is to sell everything,” says Andrew Tapparo, president and founder of Tapparo Capital Management, a financial advisory and investment management firm in Middleton, Massachusetts. “But that’s not the smartest thing to do.”
Selling in a panic is not a financial strategy.
Thinking too short term
No doubt, it’s unnerving when the Dow plunges 800 points in a single day like it did last week. There have been only two bigger point drops in history. But one bad day, or one bad week, in a market with a history of volatility is unlikely to knock your long-term goals off track.
“Don’t let the market’s ups and downs disrupt your long-term plan,” says Brad Bernstein, senior vice president of wealth management at UBS Financial in Philadelphia.
A look back at market history drives home his point. Consider that the Standard & Poor’s 500 stock average dipped less than 7 percent at the low point of the recent stock pullback.
To put that in perspective, the broad U.S. stock index has suffered 56 “pullbacks” – or drops of 5 to 9.99 percent – since World War II. And it has recouped all its losses about a month and a half later, according to data from CFRA, a Wall Street research firm.
The broad market, which hit a fresh record high last month, is up 315 percent since the bull market began back in March 2009 following the worst market downturn since the Great Depression.
Misjudging tolerance for losses
Too many people wait for a steep downdraft in stock prices to realize that the anguish of losing money, even if it’s only a loss on paper, is too much for them to handle. More often than not, the losses keep them up at night and often trigger an impulse to sell.
“Building a portfolio that lets you sleep at night is a big part of dealing with downside,” Tapparo says.
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While people need to take some risk in their portfolios to amass enough savings over their lifetime, it’s better to build a portfolio that realistically takes into account how much money you can afford to lose without getting spooked out of the market at the wrong time, he adds.
A general rule is not to have any money riding on stocks that you need to tap quickly, as there’s always a risk prices will go into a free fall when you need the cash.
Missing out after bailing out
The big risk of getting out of the market when things get rocky is that it is unlikely you will get back in and participate in the market’s eventual rally.
“Timing the market is impossible,” UBS Financial’s Bernstein says. “Selling during a pullback is the most expensive mistake an investor can make. When the inevitable rebound occurs, they are not in the market and that is when the best returns tend to occur.”
Failing to rebalance portfolio
Investors who don’t regularly adjust their overall portfolios to reflect their desired amount of stocks and bonds can run into trouble when stocks turn south, says Ken Mahoney, CEO of Mahoney Asset Management in Chestnut Ridge, New York.
Let’s say you want a mix of 60 percent stocks and 40 percent bonds. You can inadvertently increase your risk when the stock market is rising sharply and let your stock winners ride. The reason? You end up with a far bigger holding of stocks than you planned on. If you regularly adjust your portfolio, say on a quarterly basis, to make sure those portfolio percentages stay level, you force yourself to buy low and sell high, Mahoney explains.
“When the market is soaring, you automatically siphon off some of the gains, and when it takes a big hit like 2008, you add to stocks,” he says. “That strategy takes away the emotion and activates investor discipline.”
Peeking at your account balance too often
To avoid spooking yourself, try to avoid peeking at your portfolio account balance on big down days, as the size of the loss could shake you even more. A better strategy is to view your quarterly statements when they arrive every three months.
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