When the market starts to go down, it can be hard to keep emotions out of your decision making. Money you have worked hard for starts going down and irrationality sets in. You tend to think worst case scenario. “If the market is down 10% in a month, then I’ll be out of money in 10 months.” It sounds ridiculous when you type it out, but that type of emotional response can cause you to make unwise decisions when It comes to your portfolio. When the markets swiftly goes down be sure to remember two things.
- It has happened before, it will happen again
Investing 101 tells us “Buy Low, Sell High”, simple enough right?!? It’s an easy concept to understand until the market starts to go down, the headlines are negative, and you are smack dab in the middle of a market freefall. You immediately think that this time it feels different. Even though you have gone through market cycles before, you forget the prior downs. “This one just feels different.”
2. You won’t know the perfect time to get back in
Even if you do a good job of separating your emotions from your decision making and tell yourself to “buy the dip” there is a slim chance that you will buy at the bottom. It is more likely that you will be on either end of the bottom. You need to be comfortable knowing that when you put more money into the market during a down cycle it may continue to go down. Conversely, you need to be comfortable knowing that you may have missed some gain and gotten in later than the bottom.
If you stay cognizant of these two tips you will be better emotionally equipped to handle the inevitable downturns. Knowing these tips is one thing but acting on them is a different ballgame. One great way to combat the emotional aspect of investing in down markets is to do so on a predetermined plan. When you have a plan that you are sticking to it tends to take the emotions out of the equation. The plan was made during a calmer time, all you need to do is execute it. It’s similar to making a shopping list. If you go to the grocery store hungry with no list, you are making impulse buy after impulse buy. If you have a shopping list, all you are doing is executing that list.
Reading headlines, watching balances go down, and constantly wondering when it will turn around can be overwhelming. Try to remember these tips and if you have any questions reach out to your financial professional for guidance.