“As soon as the stock market has another dip, I will be ready to get more aggressive”. I hear this from almost every investor during the good times when the market is heading higher. Then, we get the downfall and…crickets. Sure, everyone knows it is better to buy low and sell high. However, in theory this is a little more difficult. “What do you mean get more aggressive?! The guy on CNBC just said the market is going down another 20%!!!” Managing these market drops and not panicking is the difference between the good and the bad long-term investors. These are the 5 things you should never do when the market drops.
Don’t turn on CNBC
If you are getting your financial advice from CNBC, you are in trouble. CNBC’s job is to sell advertising space. The way they do this is to sell panic. Many more people tune in when the market is way down, than when the market is boring and moving higher. The 20% market drop is CNBC’s Super Bowl. This is the reason they break out the “Markets in Turmoil” special each time the markets hint at a 5% decline. If you weren’t ready to panic before, wait until a guy on TV tells you this market decline, “Will be like 2008, but worse!” Cue up the fancy chart with a bunch of lines and technical analysis gibberish, and you will be pushing the sell button as fast as possible. Markets go up and down. Someone on TV predicting where the market is headed next shouldn’t dictate your investment strategy.
Don’t look at your statements
Spoiler alert: When the stock market plunges by nearly 20%, like it did in 2018, your account will also be down. One of the worst things you can do is constantly compare your account to a “high water mark”. Not long ago a client called as she had noticed that she had lost $20,000 in her investments during a downturn. She didn’t bring up that she is still up over $150,000 in her investments over the past few years. It’s a lot easier to remember the tough times as opposed to how well you may have done over the longer term. Constantly checking your account to determine how much money you have lost, isn’t going to help you invest. When you know the market is down, don’t check your account. It is easier to not panic when you don’t know the gory details of your account balance when the market drops. Unless you need a large withdrawal from your investments in the next few months, it doesn’t matter what your account balance is each day.
Don’t stop contributing to your 401(k)
A client recently came in because he had allocated a significant amount of his pay to his 401(k). He was panicking however because the stock market was heading lower and he “lost” this money. In his estimation he would have been better off putting the money under the mattress as opposed to investing the money. Now he has less than when he started the year and he is wondering if he should just stop making 401(k) contributions. The truth is that not only is he not losing this money, he is better off if he is able to buy at lower prices. Stocks must be the only thing in which people are hesitant to buy when prices are on sale. The truth is that you are much better in the long-term by consistently making contributions to your 401(k). This ensures that you are always buying market dips without ever thinking about it. Stocks go up and down and the only thing you can control is how much you contribute. The lower the prices, the more you can buy. In the long-run this is the best way to have long-term investing success.
Don’t listen to your co-workers
Trust me when I tell you that Ron from Accounting is not the next Warren Buffett. I don’t care how good he tells you he is at investing his money. Co-workers love to tell you how well they are doing in the stock market. People call me all the time about how their cube mate is doubling the market this year. How another guy on the line moved to cash right before the market went down. While eating lunch, Susan told you about how she put everything into Amazon stock right before it skyrocketed! Don’t believe it. Sure, some of it may be truth, but if your coworkers were half of the investors they tell you they are, they wouldn’t be your coworker any longer.
The reason you should avoid your statements, CNBC, and your coworkers investment advice is very simple. It helps you to not sell when the market goes down. Selling when the market goes down and buying back when the market is higher, is the kiss of death for most long term investors. Selling low is the reason that most investors earn about half of the stock market returns over the long-term. It’s certainly not easy to hold tight when it feels like the world is crashing down around you. Ignoring your coworkers, CNBC, and your account statements can be a good first step.
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Bryan Haggard CFP®, CFA is a Michigan based fee-only financial planner. He specializes in working with families to help them live a stress-free retirement. Interested in putting together a plan to help you meet your retirement goals? Schedule a time to meet below.