Despite how well-worn the “buy low, sell high” maxim is, I watch investors panic and readjust their portfolios every time the market goes down. While I know the logic that argues against this knee-jerk response, I also understand the impulse.
None of us wants to feel like losers, and it’s hard to tell in the moment if this is just a temporary rough spot or a signal to get out. People may feel the pain of losing more acutely than they feel the pleasure of winning1 and some of us go to greater lengths not to lose $20 than we do to gain the same amount. So when we start to experience a loss, our brains jump into survival mode, interpreting this loss as a threat to our survival, and hitting all our panic buttons to stop the loss.
The good news? Those who slow down and consider the facts can weather a down market.
Bear markets have historically lasted an average of 12 months, while bull markets have lasted nearly 4.5 times as long (55 months).2† In addition, while the average decline of a bear market has been 33.3 percent, the average gain of a bull market has been 151.5 percent.3† This means not only can a bull market decline be offset by a bear market, it can potentially extend the gains of the previous bull market. While investors may be focused on the risk of the decline, they should focus on a much bigger risk: missing out on the potential gains that can follow.
In a previous post, we provided a Silver Linings Playbook for different types of investors. This time, we offer the Silver Linings Playbook for riding out a market downturn:
Consider the Context.
If your concern is focused on a particular stock in your portfolio that’s taking a dive, that may not necessarily be a sign to dump it. A loss can be cause for concern, but it’s important to understand the factors surrounding it. It’s possible that a negative earnings surprise has investors panicking even though overall trends are good. They may have jumped ship and driven a price down, but the investment may still serve long-term investors pretty well. It’s good practice to compare your loss to the rest of the market—if the market has gone down 7 percent, but your stock has only gone down 3 percent, you may be doing pretty well.
"Those who slow down and consider the facts can weather a market downturn."
Keep Emotions in Check.
If the markets in general are taking a dip, dramatic news broadcasts can sometimes heighten the emotions around your investment portfolio. Media networks are experts at driving ratings, not necessarily advising your investment decisions. If you’re susceptible to being emotionally influenced by the news, try to tune out the headlines. Instead, read insights from trusted sources, such as Jean Chatzky and Seth Harris; review the quarterly earnings of companies you invest in to stay informed; and get in touch with your financial advisor.
Finally, consider asking your advisor whether you should rebalance‡ your portfolio back to your target allocation, so that you can be in the market when it starts performing again. In our next post, we’ll wrap up our Silver Linings Playbook series with key steps to making the most out of your relationship with your advisor to find new opportunities.
Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal.
† Performance represented by the S&P 500 index from August 2, 1956 - December 31, 2017. Indexes cannot be invested into directly. Index returns do not reflect any fees, expenses, or sales charges.
‡Rebalancing a portfolio involves buying or selling certain assets to maintain the original desired asset allocation within a portfolio. It may result in tax liabilities, involve transaction costs, and does not assure a profit or protect against loss.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.