It is human nature to avoid danger. When confronted by it, we are forced into a fight or flight situation. However, when it comes to managing our investments, it can be hard to resist these instincts.
There is no doubt about it. Seeing negative returns on your investment account statement is painful. With a constant stream of scary headlines and the last financial crisis fresh in our minds, you have the ingredients for a very stressful situation. Few people can shrug it off completely. If you can, kudos to you. For many, seeing these negative values on a statement causes the fight or flight reaction and often, this can be the undoing of their long term investment plan.
Doing nothing runs contrary to our instincts. But if you can do just that and avoid the investing mistakes below, you will be better positioned to weather the latest storm in the financial markets.
Here are three investing mistakes long term investors make when markets get rough:
Believing that every market downturn is the Big One:
Financial Panner Roger Whitney recently sent out a tweet showing Fred Sanford from the 1970’s sitcom Sanford & Son. For those not old enough to remember the show, it was set in Los Angeles, known for many things, including earthquakes. Roger’s tweet showed an image of Fred Sanford in a state of panic at even the slightest trembler which are so common in L.A. The tweet urged people “don’t be like Fred” when reacting to the latest market downturn. Having grown up in Southern California, I could definitely relate. Whenever, the ground began to rumble, the thought would cross my mind, “is this the big one?” After a while, you just accept that these are natural occurrences and you simply can’t freak out every time things get a little shaky. The same can be said of investing and the markets. Corrections are a natural part of the process and when they happen, it doesn’t mean we’re in for a repeat of 2008.
Convincing yourself that something must be wrong:
If you’re investing in a diversified stock and bond portfolio, you will have exposure to many different areas of the financial markets. A prudent way to invest is to allocate varying percentages among different asset classes so that you are diversified as opposed to speculating and putting all of your eggs in one basket. If you are taking a prudent approach toward your investments, the reality is that you are going to be invested in some asset classes that look flat out horrible. However, that doesn’t mean something has gone horribly wrong with your investments. Does the investment still perform well compared to its peers? Is the fund or investment still highly rated with costs that are in line with the competition? Does the investment fit within your investment objective, risk tolerance, and time horizon? The fact that your investments are currently down in value, is not in itself, an indication that there is something wrong.
Waiting to invest until the market settles down:
A common question I hear is “Should we sell our investments and go to cash, then get back in when things settle down?” Most often, the answer is “no.” The reality is that there is never an “all clear” signal to invest. There will always be military conflict brewing somewhere in the world. There will always be a natural disaster happening somewhere. There will always be companies and governments near or in default on their liabilities. The list of things to worry about goes on and on. If you wait for an “all clear” signal to invest, you’ll be waiting forever. Rather than timing the market, focus on time in the market and understand there will ALWAYS be stretches like this.
Avoiding investing mistakes and sticking to a plan can be hard when markets get rough. It is painful. And, it is stressful. However, it is often said that nothing worthwhile is easy. If sticking with an investment plan was easy, everyone would do it. The reality is that many people throw in the towel during times like these. Doing so might provide some temporary relief from the pain, but the effect on your investment plan will be permanent.