Long-term stock market performance is often described as looking like someone playing with a yo-yo while riding up an escalator. In the short term, the yo-yo keeps going up and down, representing regular market volatility. Over time, however, the markets, like the escalator, always rise steadily upwards.
Nevertheless, it’s difficult for investors to watch their portfolio lose value during those periods when the stock market is down. The expert advice: focus on the elevator, not the yo-yo.
Of course, you don’t have to just stand back. There are several steps investors can take to address the impacts of market volatility. The thing you most want to avoid, however, is resisting the urge to panic and make a bad decision that locks in losses.
Here’s a closer look at what you can do to react the right way when your investment returns are down.
Keep calm and carry on
By and large, we’re emotionally conditioned to react badly to losing money, likely with elevated levels of stress and anxiety. While it’s not always easy to overcome, the best approach to watching your investments decline is controlling your emotions as best as you can. That way, you’ll avoid the urge to panic or make a rash and regrettable move.
When you react to declines by locking in losses and getting out of the market, you’re no longer in a position to benefit from the next rebound or recovery, whenever it comes. Rebounds are often so rapid that even missing a few days of the best market conditions can have a massive long-term impact on your potential earnings.
Take the opportunity to review your portfolio
It’s always wise to periodically evaluate your holdings, even in good times, but doing so in bad times will give you a better sense of what’s still working for you, and what isn’t. Checking too often isn’t advisable, especially amid rough stretches, but a semi-annual once-over with extra attention during downturns can go a long way.
When you assess your portfolio, think about how much your time horizon (the length of time left until you retire) has changed since your last evaluation. How has your risk tolerance changed in the interim, if at all? Does the mix of assets need rebalancing to meet your preferences and objectives? The more information you can gather, the better you’ll understand your portfolio’s performance, and the better you’ll feel about it, even when it’s not performing well.
Another thing to assess is how diversified your holdings are. Overexposure to a single asset class, or a single stock, isn’t recommended because a lack of performance in one area can drag down the value of your entire portfolio. Instead, seek to diversify your holdings by investing across a range of assets and equities.
Keep investing, and look for opportunities to buy
It may seem counterintuitive to respond to a market decline by increasing your investment holdings, but the truth is a market downturn offers plenty of opportunities to those who are ready and equipped to seize them. If you’ve got extra cash, look for stocks with strong track records that are trading well below their typical market value and consider making a new investment. While that purchase might not always pay off right away, it’s more than likely to reward you handsomely if you can hold it for several years or more.
Likewise, it’s equally acceptable to keep making regular investment purchases during a downturn. The thinking here is that purchases you make when stock prices are low help compensate for the higher price you pay to invest when markets are performing well.