Stocks, cryptocurrencies and even bonds have fallen in 2022 as investors react negatively to rising interest rates, soaring inflation and the Russian-Ukrainian conflict.
The S&P 500 index is down about 16% so far this year, while the tech-heavy Nasdaq Composite is down about 26%. Popular cryptocurrencies Bitcoin and Ethereum also retreated, each dropping at least 50% from their all-time highs. Even bonds, often seen as a safe haven in times of market stress, have joined in the rout, with US government and corporate bond indices falling more than 10% in 2022.
It can be worrisome to see the markets fall so quickly and to see the value of your portfolio and retirement accounts drop. But it’s especially important during market downturns to keep an eye on your long-term goals. Don’t fall into the trap of thinking that you can time the market, step in when things are going well and exit when things are going bad. Avoiding this and other misguided moves will serve you well in the long run.
Avoid making the following investing mistakes when the markets dip.
Don’t become a short-term trader
During bearish periods, it can be tempting to catch up on the latest news and know, tick by tick, where the markets are trading. Cable news shows have fast-paced prices flashing on the screen at all times and may host evening specials to discuss what’s next. But the truth is that these so-called experts explain much better what happened than what is going to happen.
Remember why you invested in the first place and keep those goals in mind. Many people invest for long-term goals like retirement, which could still be decades away. Resist the urge to become a short-term trader just because prices fluctuate so much. If you haven’t predicted the current sale, don’t think you can predict what will happen next.
Don’t Chase Recent Winners
When markets fall, it’s natural to think about where you might be invested to avoid the current pain. But selling what has fallen to buy what has already risen is unlikely to be a winning long-term strategy. You might feel better in the short term and might even make money for a while, but you’re better off sticking to your chosen portfolio allocations and rebalancing back to those allocations as you go. prices change.
Remember that stocks are part of a long-term investment plan and volatility is to be expected. Your reward for managing periods of high volatility is an average return of around 10% per year for decades, based on the S&P 500.
Now is not the time to panic and sell everything
No one likes to see our portfolios decline during a market sell-off. It can trigger an emotional reaction in us to see the money we have saved and invested seem to disappear within hours or days. You might even have a very strong urge to sell, just to keep your portfolio from falling even further. But that would be a mistake.
Investors who think they can pull out of the market until things stabilize or until there is less uncertainty are likely to miss the rally when it does. And recovery can be as rapid as decline, penalizing those who exited and failed to re-enter.
Selling can be especially damaging if it ends up being the right decision for a while. If the shares continue to fall after the sale, you can feel good about your decision. It’s nice to see your portfolio stabilizing while the markets are still in a sell-off. But the problem is that it may look so good that you may never go back, or once you do, you’ll be forced to pay higher prices than you sold for.
Don’t constantly check your wallet
Tracking every move in the market and constantly worrying about the fluctuating value of your portfolio is unlikely to lead you to sound investment decisions during a market sell-off. If you’re constantly checking in, it’s likely a sign that you’re worried, which could make it more likely that you’ll make an emotional decision. If you can, pick one day a week to check the status of your wallet. You might be surprised to see that heavy days are sometimes followed by heavy days.
It’s also worth remembering that if you participate in a workplace retirement plan such as a 401(k), you’re likely adopting the practice of cost averaging, which is the practice of making regular investment purchases. (in this case, typically mutual funds) over time. This approach means you buy fewer shares when prices are high and more shares when prices are low.
Money is no place to hide
Cash might seem like the sweet spot when markets are in freefall, but it’s actually a lousy asset to hold as a long-term investment. With inflation at its highest level in 40 years, you are already losing purchasing power with your money in a traditional savings or checking account. The Federal Reserve expects long-term inflation to be around 2% per year, so cash will most likely be worth less over time.
If you have short-term spending needs or are building an emergency fund, it makes sense to hold cash for those needs, but it doesn’t make sense as a large position in an investment portfolio. long-term when your goals are still decades away. Holding a small portion of your portfolio in cash – say 5% or less – can help you take advantage of market declines when they occur, allowing you to make purchases at attractive prices. But remember that money maximizes its value by actually being invested at a given time, not just sitting there.
At the end of the line
Market sell-offs are confusing and can lead to emotional decision-making. But you can avoid making mistakes by slowing down and thinking about your long-term investment plan. Remember that volatility is part of investing and knowing how to manage it properly can boost your long-term returns and increase your chances of achieving your goals.