Over the past few days, the stock market has been in drastic decline, and many people are already starting to react in dramatic fashion. In fact, I’ve talked to several friends and colleagues who are worried about losing more money, swearing off the stock market, and so much more. While I understand that it feels horrible to lose 10% of your investments in such a short period of time, these are novice mistakes. How you react to a stock market crash is a telling sign of your experience as an investor.
A seasoned investor knows that the market has short-term fluctuations and unless you are close to retirement, there’s no reason to panic – and even if that is the case, you should have an appropriate allocation to match your distance from retirement. If you are a millennial and are witnessing the madness, you’re probably looking for advice on how to handle the stock market crash. Here are three mistakes that you can make in response to the stock market crash.
3 Ways NOT to Respond to a Stock Market Crash
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The last thing that you want to do right now is to sell. Any seasoned investor knows that you have to ride out the lows along with the highs. If you sell after the stock market dropped 5-10%, you are already losing that much money. While I understand why you might be afraid that it will drop lower (and it may), I can almost guarantee you that you won’t time the market correctly and will probably end up buying higher than you sold. This is why you can’t time the market, no matter how hard you may try.
Stop Investing in the Stock Market
If you are smart enough to keep your investments, you may still be tempted to walk away completely. I was talking with my dad and brother who are really interested in real estate investing (as they should), and I hear over and over how the stock market is unpredictable. In fact, I’ve heard of many people talk about giving up on the stock market completely. This is not likely to last because these people are swayed by short-term results, so when the market picks up, it will likely bring back their interest in the stock market.
Regardless of where you stand, don’t give up on the stock market because of one bad week, or month, or even year. Over the long-term, it is one of the easiest ways to fight against inflation, with long-term returns averaging somewhere around 8%. While it’s possible to fund your retirement through other investment avenues, it’s going to be really difficult without investing in the stock market.
Obsessively Watch Your Portfolio
Lastly, you also don’t want to get so concerned with what the stock market is doing that you obsess over every penny that you lose. Regardless of whether you have the discipline to avoid the first two mistakes listed above, you have to realize that investing is a long-term game and obsessing isn’t the answer.
I invest most of my portfolio in an index so that I don’t have to pay attention to it. I lean towards passive investing for the freedom that it offers me. The reality of closely monitoring every up and down of the stock market and the impact on your portfolio is that it puts you at risk of changing your investment strategy. Don’t let the bear market change your priorities.
It’s easy to get caught up in the hype of the stock market, but if you want to succeed in preparing for retirement and growing wealth, you have to have the discipline to step away and ignore all of the noise. You don’t have to know everything to start investing, but these three things are some of the basics. And if this all fails, don’t forget that investing in the stock market is not like gambling.