When the going gets tough in the stock market, even some of the toughest investors cover their eyes. Conventional investment wisdom dictates that you should never make emotional investment decisions. This is especially true on days when the markets are crashing and the tendency for investors is to cut their losses.
Research shows that it’s better to do nothing than panic sell, but is it wrong to bargain hunt when stocks are selling?
“When you’re feeling fear and panic, that’s probably when you should think about investing,” said Brad Roth, chief investment officer at Thor Financial Technologies. Unlike when you “feel the coast is clear” because that can often mask any volatility that might be present, he said.
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have a plan
Pumping more money into the markets when uncertainty about the future outlook is at its height is no small feat.
It’s understandable you didn’t jump at the chance to buy stocks on March 16, 2020, when the Dow Jones Industrial Average plunged nearly 13%, the biggest single-day drop that the index has ever known. At the same time, if you exited the market that day, you would have missed the tremendous rally that continued early this year.
That’s why it’s important to come up with a game plan before stocks see strong sell-offs, said Kristina Hooper, chief global market strategist at Invesco.
Start by thinking about what you would want to buy if the stock market fell 10% over a period of time. If you’re having trouble picking stocks, think about what you could add to your portfolio to increase your exposure to different market sectors you’re not already invested in. Hooper recommends looking for ETFs and mutual funds that focus on the sectors you identify. your wallet is lacking.
Above all, do not prepare this plan on a day when the markets are rallying or selling off, as this could skew your choices. “It’s far better to craft a plan in an emotionless vacuum and then roll it out regardless of emotions as market conditions change,” she said.
Use the purchase average
Another tactic recommended by investment advisors is averaging. Cost averaging is similar to employees choosing to have a certain amount of their paycheck paid into their 401(k) and automatically invested, for example, in a target date retirement fund.
With dollar cost averaging, you regularly commit the same amount of money to buy an asset, regardless of the price it is trading at. When it is trading lower, you will end up buying more shares than when it is trading higher. Therefore, following this strategy can lower the average cost you end up paying per share over time, as opposed to if you were trying to time the market.
It should also help alleviate some of the anxiety that arises when stocks dip, Roth said.
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Try to maintain a long-term investment horizon
If you are nearing retirement or have already retired, you are much more vulnerable to stock market volatility than people with longer investment horizons.
But if you don’t have an immediate need for the money you’ve invested, “the best thing to do is stick with it for the long term,” Hooper said. Why? Because over time, all the big ups and downs that investors see in the market fade away. Look at any major index for proof. Spoiler alert: they all go up.
If you have a long-term time horizon of at least 10 years, “there’s no reason to even consider panicking during market downturns,” Roth said.
Elisabeth Buchwald is personal finance and markets correspondent for USA TODAY. You can FFollow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here
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