Sit Tight When Stocks Drop

Do you get that feeling of panic when you turn on the TV news and see those triple-digit market drops?

You’re not alone. Unfortunately, that type of market turbulence is a pretty common occurrence nowadays.

Big market movements are becoming everyday events, but in all fairness, the markets are just as likely to climb up hundreds of points as drop down.

So how do you deal with the bumpy ride? Here’s a few tips.

1). First of all, turn off the TV. Watching the market feeding frenzy on TV is the absolute worst thing you can do.

It’s guaranteed to lead to you making damaging, panic-driven, and emotional decisions that will hurt you. So turn off the boob-tube and find something else to do.

2). Second, remind yourself that caving in to the emotional knee-jerk reaction (the one that is shouting SELL! SELL! SELL!) can cause you serious, and permanent, harm.

“The standard advice (to sit tight) is probably the right advice now. The worst possible time to panic-sell is when everyone else is panicking,” advises George Loewenstein, economics and psychology professor at Carnegie Mellon University, in an interview with The Street.

“In the past two crashes, you could have lost about half your wealth by selling at the bottom when everyone was panicking,” argues Loewenstein. “Although there is never any assurance that the future will be like the past, if you have a 10-year window, historically the best thing to do is to sit tight.”

3). Your investment allocation, or that mix between safer income investments and more aggressive growth investments, is designed for times just like this. Markets don’t always go up. We know that. That’s why you have bonds and cash in your portfolio. You can tap that money until it’s safe to go outside again.

If you really feel you can’t take the bumpy ride, it’s OK to dial it down, but make small, incremental changes rather than dramatic moves. For example, if your portfolio allocation is set at 60% stocks and 40% bonds, you can scale back the risk by down shifting to 50% stocks and 50% bonds. Clients who followed our advice to do this in the 2008 financial crisis were able to rebound quickly when the economy picked up again. Those who sold out entirely were left behind, missing one of the greatest recoveries of all time.

The Takeaway: We absolutely agree that this can be a crazy market, trading hundreds of points up and down based on a presidential tweet. But you don’t have to let it drive you crazy. So follow these tips to keep the market from getting to you, or if you really can’t stand it, consider getting professional investment advice and follow your advisor’s recommendations.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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