When the going gets tough in the stock market, even some of the staunchest investors turn a blind eye. Conventional investment wisdom says that you should never make emotional investment decisions. This is especially true on days when markets are cratering and investors are inclined to cut their losses.
Research shows that you’re much better off doing nothing than panic selling, but is it wrong to look for bargains when inventory is on sale?
“When you’re feeling fear and panic, maybe you should be thinking about investing,” said Brad Roth, chief investment officer at Thor Financial Technologies. As opposed to when “you feel like the coast is clear” because it can often mask the volatility that might be on the way, he said.
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What is a sale?
According to The Associated Press, a short sale is a quick sale of securities such as stocks, bonds or commodities. The sale can take place in a separate security – a company’s share, a 10-year treasury bill, crude oil futures – or in the broader market. A small sell-off is called a pullback.
There is a plan
Investing more money in markets when uncertainty about future prospects is at its highest is not an easy task.
It’s understandable if you didn’t take advantage of the opportunity to buy shares on March 16, 2020, when the Dow Jones Industrial Average fell nearly 13%, its biggest one-day drop ever. At the same time, if you exited the market that day, you would have missed the huge rally that carried over to the start of the year.
That’s why it’s important to have a game plan before stocks experience a big selloff, said Christina Hooper, chief global market strategist at Invesco.
Start by thinking about what you would want to buy if the stock market were to drop 10% over a period of time. If you’re struggling to pick stocks, think about what you could add to your portfolio to increase your exposure to different market sectors that you haven’t invested in yet. Hooper recommends researching ETFs and mutual funds that focus on the industries you’ve identified. your portfolio is missing.
Importantly, don’t make this plan on a day when the markets are rallying or selling, as this can skew your choices. “It’s much better to develop a plan in an emotionless vacuum and then use it regardless of emotion as market conditions develop,” she said.
Use dollar cost averaging
Another tactic recommended by investment advisors is dollar cost averaging. Dollar cost averaging is similar to employees choosing to put a certain amount of paycheck into a 401(k) and automatically invest in, say, a target-date retirement fund.
With dollar cost averaging, you regularly invest the same amount of money to buy an asset, no matter what price it trades for. If it trades at a lower price, you end up buying more shares than when it trades at a higher price. Thus, following this strategy can lower the average cost you end up paying per share than if you were trying to time the market.
It should also help ease the anxiety that comes with falling stocks, Roth said.
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Try to maintain a long-term investment horizon
If you’re nearing or already retired, you’re more vulnerable to stock market fluctuations than people with longer investment horizons.
But if you don’t have an immediate need for the money invested, “the best course of action is to stay in it for the long term,” Hooper said. Why? Because over time, all the big swings up and down that investors see in the market smooth out. Look at any major index for proof. Spoiler alert: they all go up.
If you have at least a 10-year horizon, “there’s no reason to even consider panicking during a market downturn,” Roth said.
The Associated Press contributed to this report.
Elisabeth Buchwald is USA TODAY’s personal finance and markets correspondent. you can fFollow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here
