Investors often remember the investments they sold at the worst possible time—usually right after a big market drop, and right before a big recovery. For financial advisors, “the one that got away” is often the client they just couldn't talk out of that kind of impulsive decision.
"The 2008-09 financial crisis seemed hopeless to a lot of people. We had a small number of clients who sold all or a portion of their portfolios after the worst of the decline already occurred," says Owen Murray, director of investments at Horizon Wealth Advisors in Lakewood Ranch, Florida. “In almost every case, they remained in cash for years, missing all of the recovery and a lot of the following bull market run."
When the market has a bad week (or month), it's natural to feel scared. But acting on the panic—making emotional decisions during a market correction—is one of the biggest mistakes investors can make.
As Murray points out, those who panicked in 2009 regretted it in short order. Within a year, the S&P 500 had regained about 80 percent of its losses.
Consider the “unluckiest investor in the world” worst-case scenario: Someone who bought $10,000 in an S&P 500 index fund the day before the 2008-2009 crash began—but stayed the course—would be holding an investment worth almost $18,000 today. Those who panicked and sold, and then stayed in cash during the crash would have only about $4,000.
Talking clients out of panic is a big part of Murray's job. "We [humans] are hard wired to run from danger,” he explains. “This instinct has allowed us to survive as a species.
“However, fleeing when there is perceived danger in the stock market—after a large decline—is very damaging for investors," he says. "Fear and panic can result in an investor selling to preserve what remains of their portfolio after the market has already dropped, when instead they would likely be better off running towards the danger—investing more money—and buying while stock prices are lower.”
Locking in losses with panicked selling isn’t the only mistake investors make when Wall Street starts churning out bad news. Here are three more to avoid:
You might fear you’re putting money into a losing investment, when in fact, corrections often are the best time to add new money. Don’t stop contributing to your accounts, Murray says.
When the market gets bumpy, it’s a good time to “forget” your login. Experts suggest reviewing your portfolio no more than once a quarter. “Obsessing over the market’s day-to-day moves, or even the moves within the day, by constantly checking your account balance only serves to raise your blood pressure," says Greg McBride, chief financial analyst at Bankrate.com. "Go for a walk, read a book, or get back to work. But don’t let your long-term financial security be derailed by short-term market volatility.”
When market prices gyrate, that can impact your original investment strategy, Murray points out. Say you’ve settled on a mix of 75 percent stocks and 25 percent bonds. After a drop in stock prices, your portfolio might have slid to 60 percent stocks and 40 percent bonds. Periodically examine your current mix to make sure you aren’t abandoning your carefully thought-out strategy, and adjust as necessary, he says. This move, called rebalancing, is something investors should do anyway—and it also fulfills that natural urge to “do something!” after a market correction.
Murray says the real trick to talking clients off the cliff is a conversation about investment philosophy. "In almost every case, our discussion comes back to their long-term financial goals and the role their portfolio is meant to play," he says. "If you have confidence that the market will be higher 20-plus years from now, there is no reason to obsess about day-to-day swings or a large—and likely temporary—decline.”
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