Well, the real question is how to handle a stock market downturn and still stay sane! As much as we love to see the value of our investments continue to climb, markets do come down. And, they go up again. Eventually.
But when they do take a downturn, it can feel like forever waiting for them to come back up. And that’s what I want to talk about today. Some people get so nervous seeing their money go south, they want to sell and stop the bleeding.
And that’s usually NOT the smartest move. Thing is, if you haven’t sold it, you haven’t lost a penny. But that’s a hard concept to hold on to as values plunge.
Why you shouldn’t rush to sell your stocks
First, you really need to keep telling yourself that you have not lost a penny if you haven’t sold. I know it feels like you have. And the more you stare at the numbers the more you start to worry you’ll lose even more. But if you’re going to invest, you need to learn to ride out the downturns.
So how to handle a stock market downturn?
- Don’t watch the numbers every day. You’ll drive yourself nuts.
- Make sure you’ve invested in a way that spreads the risk. A diversified portfolio, with stocks and bonds, will help smooth out the volatility.
- If you need to look at something, take a look at this 120-year stock market history chart from Marketwatch.com:
⇒ Notice that the line may be jagged, but over time it goes UP!
Why it doesn’t pay to try to time the market
Hedge funds make a living timing the market. Knowing when to get in and out. And going long and short to try to ride the wave in the direction they guess it’s going. Some trades even happen within a day or less. And, as a result, some of them do quite well.
But as an individual investor, the odds of you making ALL the right moves are slim to none. So if your method of how to handle a stock market downturn is to bail, and then you buy back in when you feel sure it’s heading up again, you’ll probably lose money.
You see, it headed up anyway — but you wound up being out of some of the climb and paying commissions on top of that. If it’s the whole market heading down, you’re better off waiting it out. Panic sellers just give in to emotion. But look at the chart again and let reason rule.
Exception to the rule
When an entire market is heading down, it will eventually come up. BUT if you have a stock that was hit with some especially bad news sending it into an irreversible tailspin, it may be time to cut and run. This is where you need a broker you can trust — and some old-fashioned research on your own.
Not all dogs (lousy stocks) have to go. Some of them do bounce back. So make sure you have all the facts before selling. Or deciding to buy more, which can also be worth considering. Although, as part of a well diversified portfolio, you don’t want to be too heavy in any one thing.
You don’t need all your investment money today!
One more thing that send investors into a panic during a downturn is worrying about retirement. Especially if you are close to retirement age or already there. What if you won’t have the money you need because your investments lost so much value?
Well, first of all take a few deep breaths. If you diversified well enough, you have a enough different types investments to choose from the ones that are doing the best. But also, you don’t need all your money at once. Keep looking at the chart above. And just use what you need for now.
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