Water Well Journal
Issue link: http://read.dmtmag.com/i/608970
W hy do so many of us panic? Perhaps it's because our brains are hard-wired, telling us to run whenever we sense danger. But whatever the reason, when the stock market goes into a serious correction and prices fall, many investors tend to panic. It's as if their brains seem to send them an urgent message declaring it's time to sell. Conversely, when things are humming on Wall Street and prices are hovering at their highs, it's often those same investors who can't wait to get in on the action. The result for those investors (and some experts tell us, most investors) is the costly mistake of selling low and buying high. That, of course, is the precise opposite of the path fol- lowed by the most successful investors—buying low and selling high. It's true, pulling out of a bear market when prices are drop- ping can appear to benefit your investment portfolio by limit- ing the short-term damage. But it can also cause missing out in the inevitable rebound that follows a big drop, by failing to get back in the market soon enough. Being out of the market—even for a short time—during a major rebound can result in the loss of considerable wealth- building profits. So what should you do during a market correction? Maybe . . . nothing, say many financial professionals. "Often, the wisest thing to do during periods of extreme market volatility is to stick with the investment plan that you've already devised," says Bill McNabb, Vanguard Fund's chairman and chief executive officer. "Equity markets have reaped sizable gains over the past six years. Such setbacks, while unnerving, are inevitable." Such a do-nothing approach might be a tough path to fol- low when you're frightened by sharp unrealized losses in your investment portfolio. But turning those unrealized losses into real losses by selling out can be the worse thing to do. McNabb points out no action is actually an active deci- sion—and can be the right decision for reaching your long- term financial goals. McNabb is not alone in his feelings. Listen to what Charles Rotblut, a certified financial analyst, has to say. When the markets are rising strongly, investors are more likely to put money into stocks (buying high). When a steep market correction or a bear market occurs, many investors move to sell their stocks (selling low). Then, once the market has re- bounded and recorded significant gains, those same investors notice the profits they are missing out on and decide it's time to put money back into stocks (buying high). This repetitive cycle results in a process of locking in big losses and missing out on big gains. While most financial professionals recommend you sit tight during major market corrections, there are those (includ- ing Warren Buffett, often cited as the world's most successful stock market investor) who say such a time is a rare opportu- nity to build your wealth by buying stocks. Not every investor will have the stomach to buy more stocks when prices are falling, even though history tells us Buffett is correct in his belief. For those who find even a do-nothing approach can be unnerving when stocks are taking a nosedive, here are some things we can do to help settle our nerves. Keep reminding yourself stock market corrections are common and inevitable. The long history of equity investing is peppered with major and minor corrections. In less than 100 years, starting with the major market crash of 1929 to the real estate "bubble" crash of 2008 to the more recent Chinese economy correction be- ginning in June 2015—there have been no less than a dozen significant market corrections. Every one of those events has been followed by rebounds that led to new market highs, except for the more recent one that hasn't yet had the time to follow suit. Clearly, history is on the side of those who say stick to your own investment plan by sitting tight during a market cor- rection. Of course, it's important that you have a plan of your own including a well-diversified portfolio in order to benefit fully. Don't let emotions get the best of you. Constantly checking stock prices during a market decline coupled with exposure to doomsayers' market predictions is sure to rattle you more than it should. When emotions domi- nate our decision-making process, good judgment is certain to suffer. Successful investors have learned they must make a special effort to prevent their emotions from unduly influencing their investment decisions—particularly decisions to sell. Perhaps the best way to accomplish this is to break the habit of agonizing over daily fluctuations in market prices. WILLIAM J. LYNOTT YOUR MONEY RESISTING PANIC When prices fall, the best plan can be one of no action. 52 December 2015 WWJ waterwelljournal.com