One of the hardest things to do as an investor is to keep your head — especially during market events.
We are going through uncertain times right now. There’s been a nice bull run, but the potential for a major drop is growing.
While it’s not always bad to use your emotions in your investing plan, you do need to watch out. Letting your emotions turn into blind panic as you make decisions about what to do next can be detrimental to your portfolio.
It’s no good if you freak out when the market is tanking and sell everything, locking in your losses. What’s worse is when the market recovers and you miss out on those gains.You need a plan for keeping your head during market events.
You need a plan for keeping your head during market events.
It’s hard to take a step back when everything is in disarray. If you turn on the TV, all the commentators are gleefully telling you how bad it is. When you check the Internet, there is no shortage of click-bait headlines telling you the end has come.
And, of course, everyone around you seems to be selling everything and moving into cash.
But, before you do anything, you need to take a step back. Take a deep breath. Turn off the TV. Stop browsing the Internet. Block out the noise.
If you sell now, during a market event when everything is tanking, you lock in your losses. You’ve just disobeyed the cardinal rule of investing: buy low and sell high.
Your next step is to review the fundamentals of the investment.
Has anything changed?
Yes, the price is going down. But everyone’s price is going down. It’s a market event.
Honestly evaluate the investment and do a little fundamental analysis.
Is anything really different with the asset in terms of what makes it tick? A good investment can still be a good investment, even when it’s losing value.
If the fundamentals haven’t changed, and it’s still a good choice for your portfolio and a good overall value, now is not the time to abandon it. In fact, it might be time to buy more, if you have the resources available to do pick up a few shares at a bargain price.
Don’t forget about your investing plan. Once you’ve calmed down a bit, remember that you are in it for the long haul.
Market events happen. On a year-to-year basis, the trend line can look choppy. But when you zoom out and look at the long term, things tend to smooth out.
Remember your long-term investment plan. Remind yourself of what happened after the last major market events.
Sure, there’s a chance that this time it might really be the end and the whole economy will collapse. That’s always a possibility. It’s a remote possibility, but it’s there.
But you don’t want to live in fear around that. Instead, think about your investing plan and what you hope to accomplish in the long run. Think about why you have adopted the strategy you use, and remind yourself that markets usually recover.
As you do this, you can talk yourself down from the ledge and make better decisions. You’re a long-term investor, with a plan. You don’t want to throw it away because of what amounts to a blip on the long-term stock charts.
Sometimes it can make sense to sell during a market event. But it needs to be planned out, based on your needs. It can’t be a snap decision made because you’re freaking out.
Only sell if you can see that the fundamentals have changed. If there’s something about the investment that has changed on a basic level, leaving you concerned about its ability to weather the storm, it might be time to sell.
Make sure you consider the tax implications. If you sell at a loss, you end up with a tax deduction. If you still manage to eke out gains, you will have taxes to pay.
As you evaluate the situation, consider which scenario is best for your finances. Sometimes, selling low and taking the loss to unload an asset that has been disappointing can make sense for your finances come tax time.
No matter what you do, though, a calm and cool head is important. It’s the way you will make your best decisions.