This January proved to be the worst start to the year for U.S. stocks, with most indexes losing money during the month. And, while the market has moved upwards, the recent correction raises a common concern for many investors: What do I do when markets plunge?
While I don't recommend attempting to guess where the market is going, it's important to have a well thought out game plan should things get ugly. Having a plan will help alleviate stress and enable you to stay committed for the long-term.
Below are my five tips for keeping it cool when markets fall.
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1. Buy More
If your time horizon and risk profile allow for it, a drop in prices could be viewed as an opportunity to add to your investment. As Warren Buffett once said, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." Could prices keep falling? Absolutely. If the prospect of prices falling further scares you, consider implementing a dollar cost averaging strategy. Pick a dollar amount and a time period, and make regular contributions to an investment. For example, you might commit to investing $100 on the fifteenth of each month for six months.
The key is to commit to the strategy and not be influenced by where you think things might be going and change your plan mid-cycle. To help lower the temptation, consider automating the process with the help of your financial adviser or custodian.
2. The More You Read, The More You Will Know
I'm not suggesting following daily headlines; instead, educate yourself with books from well-respected authors who can help you become a smarter investor. In my experience, anxiety about money and investing can often be reduced through education. If you're looking for a place to start, I recommend The Behavior Gap by Carl Richards. It's an easy, informative read, great for new or experienced investors and even financial professionals.
3. Do Nothing
During volatile periods, investors often feel inclined to make changes to their portfolios. Taking action gives people the perception of control—even if those actions do not generate positive results. Even though doing nothing during a turbulent time is extremely difficult, it can actually be better than doing something. Don't lose sight of your long-term goals—be patient and do nothing.
4. No News is Good News
While it's important to stay informed, the more you update yourself on market fluctuations, the more volatile it will appear. Remember—no one truly knows what will happen next, nor does your media outlet have insight to your personal financial situation or your goals. Turn off the news (broadcast, online, social media, etc.) and disconnect from the frenzy, at least temporarily.
5. Reassess Your Risk Tolerance
Recent events are a good reminder that markets don't always go up. Use this time to reflect on your behavior over the last couple of months and reassess your tolerance for risk. Were you worried? Did you panic? Did you lose sleep? Perhaps your portfolio is not positioned appropriately. If it is not in line with your tolerance for risk, you might have a harder time holding on during times like these.
Regardless of how you feel when markets plunge, remember you can't predict or control the markets. Have a strategy in place that helps mitigate your risk (and lower your stress levels) and stay focused and committed to your long-term goals.
Taylor Schulte, CFP® is founder and CEO of Define Financial, a San Diego-based fee-only firm. He is passionate about helping clients accumulate wealth and plan for retirement.
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