Few things test an investor like logging in after a sharp market drop. Watching savings you have built for years fall quickly creates a powerful urge to sell and protect what remains. Over time, though, panic selling in a down market is one of the most damaging moves an investor can make.
Downturns Have Historically Been Temporary
Market declines are a normal part of investing. Over long periods, the US stock market has recovered from every downturn it has faced. However, some recoveries have taken years, and there is no guarantee about the future. Investors who sell during a decline lock in their losses. Many also wait too long to buy back in and miss the early part of the rebound. That early stretch has often been among the strongest.
A Downturn Can Be an Opportunity
Do you have cash set aside and a long time horizon? Then lower prices can be a chance to buy quality investments at a discount. Rebalancing during a decline can position a portfolio for the recovery. That means selling some of what has held up and buying more of what has fallen. It is the opposite of what fear tells you to do, which is part of why it works.
Volatility Is Part of a Healthy Market
A body that never faces physical challenges never gets stronger. In the same way, investors should view markets that never decline with suspicion. Periodic downturns help correct prices that have run ahead of reality. They can also let some air out of bubbles before they grow larger. Our article Is the Stock Market in a Bubble? looks at that side of the story.
Warren Buffett once wrote that his favorite holding period is forever. You may not plan to hold every investment forever. Still, you should be selling for the right reasons, such as a change in your goals or a need to rebalance. Trying to stop the pain of a falling market is not one of them.
Prepare Now to Avoid Panic Selling in a Down Market
The best time to decide how you will react to a downturn is before it happens. Keep enough cash and stable investments to cover near-term needs. That way, you never have to sell stocks at a low point. Choose a mix of investments that matches your time horizon and your real tolerance for risk. Aim for your real tolerance, not the one you feel during a strong market. And write down your plan so you can return to it when headlines are loud.
Get a Second Opinion Before Panic Selling in a Down Market
If a market drop has you questioning your portfolio, talk it through before you act. We can review whether your investments still fit your goals and your comfort with risk. Learn about our asset management approach, or call 203-949-1710.
This article is for general information only and is not individualized investment advice. All investing involves risk, including possible loss of principal. Past performance does not guarantee future results.