This month’s volatile market sell-off is a reminder of just how delicate the stock market can be. It’s been roughly a decade since U.S. investors have had to deal with a potentially major stock market decline. If the recent stock market sell-off is the beginning of an even larger decline, investors need to be comfortable with their game plan for navigating an extended period of market underperformance. There’s no perfect formula for investing in a down market, but here are seven of the worst decisions investors can make during a market downturn.
They sell everything.
Assuming your portfolio is well-diversified and balanced based on your personal risk tolerance, long-term financial goals and investment time horizon, there’s absolutely no reason to sell your stocks and retreat to cash. Even the most optimistic long-term investor should understand that the stock market doesn’t rise in a straight line. Both the U.S. economy and the stock market are cyclical in nature. According to Guggenheim, the S&P 500 has declined between 5 and 10 percent 78 times since 1945, and it took an average of just one month to return to its previous level.
They panic.
Investment decisions should always be made rationally, not emotionally. It’s difficult not to panic when the market is tanking, but Owen Murray, director of investments for Horizon Advisors, says that for long-term financial plans to work, its critical for investors to stay the course during times of market weakness. “Panic can lead to irrational decisions, such as selling after the worst of the downturn has already occurred,” Murray says. “Selling during a sell-off may feel the like right choice at the time, but it will most likely result in a permanent loss of capital.”
They do too much.
There’s nothing wrong with adjusting or rebalancing your portfolio a bit during a market downturn, but there’s no need to reinvent the wheel. For extremely proactive investors, it may be difficult to sit on your hands and watch your portfolio suffer rather than take action. However, TD Ameritrade chief market strategist JJ Kinahan says the best course of action for long-term investors is often to do very little. “That is, if you have a time frame of two years or more on your investments, this is just a bump in the road,” Kinahan says.
They are too short-sighted.
The worst-case scenario during a stock sell-off is that the S&P 500 might enter a bear market. However, the average U.S. bear market has lasted just 1.4 years. Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, says trying to time the market in the short term is the biggest mistake he sees investors make. “It’s the volatility of the stock market that allows…
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