As humans we feel about twice as much pain from losing money as we feel pleasure from gaining money. The pain we feel as investors when the market drops can lead to poor decisions if we’re not careful to avoid reacting out of fear. Be sure to avoid these common mistakes during the next market downturn.
Mistake 1: Watching your investments too closely.
There isn’t a reason to watch every move of the market and your investments, especially if doing so stresses you out and causes you to make changes to your portfolio based on emotions. After all, most of the decline might be over by the time you think you should “do something.” If you follow a solid investment strategy and have a properly diversified portfolio then you can tune out when the market turns volatile and go do something you enjoy.
Mistake 2: Moving to cash.
The first reaction of many investors to a downturn is to sell their investments and stay in cash until the market “gets back to normal.” The problem with this strategy is that volatility and uncertainty are normal for the stock market. By moving to cash you turn paper losses into real losses and then have to risk getting back in too late and missing gains, or getting back in too early and suffering more losses.
Mistake 3: Not continuing to invest.
Even if they avoid the mistake of moving their current investments to cash, many investors stop making additional investments when the market drops. If you haven’t finished building your nest egg then you should look forward to market downturns as an opportunity to invest in solid companies at discount prices. If you were about to purchase a home and the one you wanted suddenly dropped in price by 20%, would you wait until the price went back up to buy it? Of course not! You’d buy it and tell everyone what a great deal you got!
Mistake 4: Chasing quick profits.
Even though a downturn is a buying opportunity for long-term investments, the market could continue to go lower before rebounding. Avoid using leveraged investments or a margin account to try to make quick profits from the volatility. Think long-term when adding to your portfolio.