In times of uncertainty, market shifts can have a significant impact on the economy, and on your portfolio.
Let’s take a look at some do’s and don’ts for how to stay invested in the market.
Do: Take headlines with a grain of salt
When markets are volatile, headlines usually focus on sensational news that grabs your attention. But it’s important to tune out the headline noise. Long-term investing involves defining your goals and putting a strategy in place that fits your situation and tolerance for risk. It means investing in a portfolio of securities or mutual funds that you anticipate owning for a number of years. Markets may be choppy now, but over time, the experience of a long-term investor becomes smoother, with a smaller range of ups and downs.
Volatility of diversified portfolio decreases
Did you know checking your portfolio every day can lead to poor investment decisions? It’s because of something called loss aversion. Loss aversion refers to the fact that people dislike losing money more than they like making it. So when you look at your portfolio when markets are up, you’ll feel good. But when you look at your portfolio when markets are down, you’ll feel really bad.
This is what prompts some investors to sell when markets are falling – only to watch the recovery from the sidelines. Discouraged by their losses, it takes them a long time to recover their confidence and get back in the market. And that adds up to a lot of missed opportunity.
The overall cost of these actions is staggering, as you’ll see in the chart below. Over the past 20 years, the average balanced fund investor has experienced an annual rate of return that is 3.1% lower than investors who stayed the course.
The cost of taking action in market crisis
If you’ve already moved out of the market and into cash, you might be avoiding some volatile shifts. However, staying in cash for an extended period of time ultimately chips away at your purchasing power, or how much your money can buy. As the cost of goods increases over time, it could diminish the overall value of your money.
Taking the first step is the hardest part. That said, trying to time the perfect moment to get back into the market is nearly impossible. For some, investing a small amount at a regular pace allows them to gradually re-enter the markets. This is called a dollar-cost averaging (DCA) strategy. DCA can help you create a smoother investment experience. You don’t worry about hitting the perfect moment to get back in the markets.