During what's called a "sell-off" — a short period of time during which a high volume of securities are sold, causing a price drop — it can be tempting to sell your investments as well. But experts agree that selling when the market falls can hurt your long-term financial health. That's because if you sell in a moment of panic, you'll lock in your losses and potentially miss out on years or even decades of growth.
Here's what you need to know about a market downturn and a few things to keep in mind about your 401(k) or IRA as you ride out this stretch of turbulence.
After the S&P 500's sharp 13% decline last week, it's understandable that such a steep drop may have investors on edge. And last week's drop was particularly dramatic, in that it marked the end of a five-month period of sustained growth.
This market correction — defined as a decline of at least 10%, but less than 20%, from a recent high — was dramatic, but it wasn't totally out of the ordinary, either.
Bumpiness in the market is normal and even expected. This can be hard to accept, especially during a slump stemming from a global heath crisis, the long-term effects of which remain unclear. But what is certain is that if you pull out your investments during a decline, you've ensured that you can't recover from any market rebounds. And in the past, every downturn has ended in an upturn.
Morningstar, an investing data firm, analyzed 20 years of market activity leading up to 2017 — a period that included the 2000 dot-com bubble and the 2008-09 global economic crash — and found that someone who kept their investments during those years would have seen an average annual return of 7.2%. An investor who missed only the 10 best days over those two decades saw their return drop to less than half that: just 3.5%.
Family Management Corporation CIO David Schawel recently made a similar point on Twitter, noting, "It's amazing how destructive it is for people who sell out and miss a handful of the best days."
That's why, if you're decades away from retirement, the smart investment move is pretty straightforward: Do nothing, and ride it out. Investors in their 20s, 30s, and 40s still have plenty of time to let the power of compound interest work hard to build their wealth for them.
"Long-term investors with the ability and fortitude to remain in the market should do just that," says Mark Hamrick, a senior economic analyst at Bankrate. "This is for certain: One locks in a loss by selling."
While the value of your investments may have fluctuated recently, you can best take advantage of long-term growth by making consistent contributions into an investment account and staying focused on your long-term goals.
In other words, though it may seem counterintuitive, it's smart to continue to invest at the same regular pace. When the markets drop, securities cost less, which means you can purchase more shares for the same amount of money. Your contributions go further, which means you're better poised to grow the next time the markets reach new highs.
Video by Courtney Stith
Having a diversified portfolio can help to balance out market spikes and slumps and allowing your money to grow over the long-term. You'll want to tweak your asset allocation periodically to make sure your stocks, bonds, and other assets are in alignment with your tolerance for risk and the guidelines for your age group.
Using a "set it and forget it" strategy can also reduce some of the anxiety that comes with making investment decisions. By automating the process, you'll be making regular contributions to your retirement portfolio at fixed intervals, a strategy known as dollar-cost averaging.
Lastly, don't check your portfolio too frequently. Tracking every dip and spike in your investment portfolio during a rocky stretch is bound to create stress, and experts say it's unnecessary.
"If you're under 50, checking your portfolio quarterly is more than sufficient," Joe Wirbick, a financial planner in Lancaster, Pennsylvania, previously told Grow. "You're at a life stage when you shouldn't do anything. You want to stay the course. You can handle the ups and downs."
Despite periodic bouts of turbulence, the long-term historical average annualized return for the S&P 500 is almost 10%. The coronavirus triggered the current record drops, but the market swings back and forth for many reasons, and those swings are often hard to anticipate.
"I'd imagine if it wasn't the coronavirus — which is serious and I'm not making any light of that — it would have been another event that would have caused the markets to correct," says Erika Safran, a certified financial planner and the founder of Safran Wealth Advisors in New York. "I just don't know if the depth that we are reaching now would have been motivated by another event."
Legendary investor Warren Buffett agrees. Because the market has always bounced back, even after drastic sell-offs, he believes long-term investors don't need to worry. In fact, his advice is to buy, and even to "be greedy," when others are fearful.
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