When the market is rising, buying stocks feels like a sure way to grow your wealth. During rising markets, no one questions the enthusiasm of market participation. But when the market begins to fall, how quickly we question any level of market involvement.
Regardless of when you buy, one fact always remains: Buying Low and Selling High is the only way to turn a profit.
So why, when the market begins to drop, do many investors want to sell?
Why does selling low feel right when the market is down?
The answer is simple. It is because, for many, investing is emotional. We buy when the market is high because it feels good to do what we believe everyone else is doing. We sell when the market is low because investing is no longer "popular".
As a result, one of the biggest challenges of successful investing is overcoming our emotional tendency to seek safety and pleasure.
Only time will tell how long the current downturn lasts. However, a few points below are helpful to keep in mind to remain focused on your longer-term investing and retirement plan:
- Bear markets have historically been far shorter than bull markets. Since 1966, the average bear market has lasted approximately 15 months and resulted in a 38% decline, according to the Schwab Center for Financial Research. By contrast, the average bull market has lasted nearly six years, with a gain of approximately 210%. The last bull market brought gains of more than 400% over 11 years, while the current bull market has seen an advance of more than 100% in less than two years following the shortest bear market (March 2020-one month) in recorded history.
- Diversification is designed to help moderate declines. Investing in a diversified portfolio that includes a mix of stocks, bonds, commodities and cash based on your goal, time horizon and risk profile can help moderate overall portfolio volatility.
- Staying the course can help shorten your recovery period. While seeing your portfolio decline never feels good, investing in a diversified portfolio and sticking with your targeted allocation can help speed recovery.
- Market timers risk missing the rebound. Selling in a panic amid a market decline typically means locking in short-term losses and getting off track from your longer-term plan. Staying the course and rebalancing to keep your targeted allocation consistent is generally a wiser strategy. The biggest gains often come in the early stages of a recovery, and missing even just the first month of gains can have a big effect on future performance.
- Having a longer-term plan and sticking to it is key to investment success We know that markets can be volatile in the short term. But we also understand that having a long-term strategic asset allocation plan and sticking to that plan through periods of market volatility are among the keys to long-term investment success.
- Buying through a down-turn through dollar-cost-averaging into your 401k or IRA There seems to be a market frenzy to buy equities when the market is rising. However, the best time to buy is actually when the market is falling. Buying low remains the best way to earn above average long-term returns. In fact, you can boost the benefit of dollar-cost averaging even more if you increase the dollar amount of your 401(k) contributions. If you can afford to do it and your risk tolerance will allow it, it's definitely worth considering, experts say. Just remember, the market could go down even more or stay down a long time.
Source: Have a Plan and Stay the Course When Markets Turn Turbulent