7 things to do when you’re spooked by the stock market

Reprinted courtesy of MarketWatch.com
Published: Dec. 12, 2018
To read the original article click here

The stock market has been awful this autumn, knocking many normally placid investors off their feet.

In times like this, the most successful investors I know are careful to avoid leaping into panic mode.

It might seem that your investment results are largely outside your control. But in the long run, just the opposite is true.

Your anti-panic tool kit should include perspective and knowledge. And while I strongly advise you to have access to — and to use — competent and conflict-free outside help, that help won’t do you much good unless you have the right habits and expectations.

First, let’s recap the unpleasant news from Wall Street.

Last week, the year’s gains in the stock market were wiped out in a few awful trading days. The most-often-cited reasons were falling U.S. oil prices (off by about one-third in the past two months); trade worries, especially with China; a surprising dip in interest rates; and fear of a recession.

Memories of the 2008 financial crisis loomed, and the financial media predictably jumped in with both feet to fan the flames of doubt and worry.

It’s true that the stock market lost more than half its value in that crisis a decade ago. It’s equally true that the market unexpectedly and quickly roared back in 2009 in what proved to be one of the longest and strongest bull markets on record.

Maybe the scariest thing last week was sudden downward volatility. By the end of November, the S&P 500 index SPX, -0.17% had gone up or down by 2 percentage points or more on 15 separate trading days in 2018 — something it didn’t do even once in 2017.

Read: S&P 500 lows? We ain’t seen nothing yet, says Gundlach

During Thanksgiving week, the S&P 500 was UP 4.8%. In the following week, it was DOWN 4.6%. That’s volatility.

No wonder so many investors were nervous.

Now that we have that startling news out of the way, let’s turn to the more useful topic of what investors should and should not do about it.

Here are seven things you can do when the stock market’s volatility is making you jump.

These tips won’t change the performance of the market, the direction of the economy, or the behavior of other investors. But they will be beneficial to your money and your sanity.

1. Don’t overreact. In fact, don’t react at all. If you do anything, respond based on careful thought, not knee-jerk reaction.

Focus your attention on your long-term goals, not what’s right in front of you. Corrections in the stock market are totally normal, and the same is true of bear markets.

Over the past 90 years, the market has gone up in about two of every three years. Stocks have survived world wars, atomic bombs, natural disasters and all manner of other events that seemed catastrophic.

Often (though certainly not always) the market’s recovery has been stunningly swift. Those investors who fled to safety in hard times typically missed out on great market recoveries.

2. Focus on what you can control. You can’t control or even influence the economy or the market. You may have trouble controlling your emotional reactions.

But you can control your decisions and your behavior. Read on.

3. Once you accept the fact that bear markets are normal, prepare your portfolio for a bear market.

The best way to do this is to assess your tolerance for risk and your need for returns, then build a portfolio with the proper mix of stock funds and bond funds.

What should that mix be for your particular case? See item No. 5 below. If you need a number to begin thinking about this stocks/bonds equation, consider a 50-50 split. That’s how I have developed my own portfolio. I think of it as a way for my family to have peace of mind along with a piece of the action.

4. Diversify. Millionaires own thousands of stocks, and you can too, using low-cost index funds. Own small-cap funds and large-cap funds, value funds and blend funds.

If you’ve been spending time following (or searching for) individual stocks, just cut it out. Seriously. And if you’re determined to beat the market, give that up too.

As one well-known longstanding study keeps demonstrating year after year, the vast majority of investors who try to beat the market wind up being beaten BY the market.

5. Get some expertise on your side. Consult with a conflict-free financial adviser who does not sell any products. He or she may recommend products but should not receive compensation from anyone but you.

Use your adviser to find out: Are your financial and investment goals realistic? Are your investments properly diversified? Are you taking an appropriate level of risk? What else could you be doing that will increase the likelihood of your long-term success? Do you have habits and attitudes that are likely to help you succeed?

6. Take a deep breath and then just stop watching the financial news on TV. You might not want to do this one, but trust me: It can make a big difference to your financial sanity. I’m talking cold turkey.

If that’s too scary to even contemplate, then try this. Make a commitment to go “cold turkey” for one entire week, during which you will pay no attention to the market or the performance of your investments.

At the end of that week, make a list of the terrible consequences that occurred because you were out of the hour-by-hour or day-by-day loop. If you have anything to put on that list, send me an email. I’d be curious to know — and it could even provide material for another article.

Why should you turn off the financial news? I’m sorry to break this to you, but the financial news industry, especially television, is not designed to help you be a better investor.

This industry is designed to sell advertising. That requires making sure the audience keeps coming back again and again. The way to do that is not by teaching investors once and for all what they need to know. The way to keep them coming back for more is by keeping the audience excited, fearful, uncertain, nervous.

If you think I’m wrong, watch a couple of hours of CNBC with this in mind.

7. Educate yourself. This might be the best item on this list. Here are four good ways.

•Read John Bogle’s “The Little Book of Common-Sense Investing.”

•Read “How to Think About Money” by Jonathan Clements.

•Read my book “Financial Fitness Forever.”

•Check out my podcast “Lies investors believe—especially in falling markets!”

If you take this list seriously, I am confident that you’re likely to be much more successful in meeting your long-term goals.

And the market’s volatility will bother you a lot less.

Richard Buck contributed to this article.