Last year, the stock market’s ups and downs were a gentle bobbing ride on a lazy river. This year, the market has more peaks and troughs than the Storm Runner roller coaster at Hersheypark.
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In 2017, the S&P 500 had just eight days with 1 percent movements for the entire year. As of mid-April, the S&P 500 had moved up or down at least 1 percent on 28 days in 2018. That’s 15 increases – which no one complains about – and 13 drops. Thanks to all the ups and downs, the S&P 500 closed at May 29 down 0.2 percent for the year.
Although the market index is on target for a 10th consecutive year of positive returns, there’s no end in sight to the volatility, and volatile markets are when investors often succumb to loss aversion. This is the tendency for investors to feel the pain of losses more than the joy of gains. Consequently, investors get impatient and sell.
But you shouldn’t let your queasy stomach trick you into making some of your worst investing moves all because of the market’s temporary dizzying swings. That’s a recipe for investor’s remorse. Instead, control your loss aversion and avoid these common mistakes that investors often make in a volatile market.
Thinking you’re a trader. Smart investors know better than to buy and sell in a topsy-turvy market in an attempt to outperform it. Even traders get burned timing the markets, and ordinary investors are unlikely to do better.
Recognize that you are an investor, not a professional trader. “If you are an investor, you are looking for the long-term growth of the market and should be less attuned to the noise of the market, which is what volatility is,” says Morris Armstrong, registered investment advisor at Armstrong Financial Strategies in Cheshire Connecticut.
Checking account values too often. An easy mistake to correct is the one of checking account values too often, which can happen more frequently during volatile times, says David Ruedi, Financial Advisor at Ruedi Wealth Management in Champaign, Illinois. Checking those values daily is like riding “an emotional roller coaster that causes unnecessary anxiety and makes it more difficult to stick to an investment plan,” he says
Long-term investors don’t need to track their portfolios that closely. If you’ve been investing for a while, you understand that markets go up and down, sometimes by a small amount and sometimes not. Just ignore all the market drama and your see-sawing portfolio balance until things settle down.
Selling in a rush after a market tumble. The classic mistake of over-reacting and selling on a down day does more than just lock in losses. It creates another problem: when to buy back in.
Investors get wrapped up in their emotions and panic sell their investments to wait until things get better. “The problem with that behavior is when things are better, prices will be higher,” Ruedi says. “So investors have already missed out on returns they could have easily earned if they had just remained in their seats.”
Ignoring the benefits of dividend-paying stocks. By focusing solely on share price when markets tank, you ignore a portion of the investment return just when you need it the most. “Dividends can reduce price-based losses and provide cash for investing in stocks at lower prices,” says Russ Blahetka, managing director of Vestnomics Wealth management in Campbell, California. Over-reacting to price drops means missing out on the benefit of compounding dividend returns.
Staying on the sidelines. After a market drop, investors are often too afraid to re-enter the markets. Instead, investors stay on the sidelines and store cash “under a proverbial mattress,” says Paul R. Brown, CEO of Clearstone Wealth Management in Liberty Lake, Washington. Over a year ago, Brown helped a business owner sell his successful company, but the owner, fearing a market loss, held on to the proceeds in cash, missing the robust 20+ percent stock market return of 2017.
Thinking cable TV has actionable financial advice. Taylor Kovar, CEO of Kovar Capital in Lufkin, Texas, implores investors to understand that the talking heads on TV are there to gain viewers and entertain, not serve as your financial advisor.
After all, who would tune in if the television experts advised investors to create a sensible portfolio and stick with their strategy through market ups and downs? That would be a recipe for a failing network – albeit a successful investment approach. So don’t make the mistake of basing your investment decisions on the dizzying array of TV financial news and advice.
Taking market headlines too seriously. Although headlines generate market volatility, they don’t affect a company’s strength, says Meghan Shue, senior investment strategist at Wilmington Trust in Wilmington, Delaware. Company fundamentals such as sales, earnings and cash flow drive long-term stock prices. And these fundamentals don’t change when the market falls because of a geopolitical event or other breaking news.
What’s happened in 2018 is a case in point, Shue says. “Despite this year’s volatile start, investment fundamentals have, for the most part, remained sound.”
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