When it comes to investing, market corrections are inevitable. Since 1950, there have been 37 declines in the S&P 500 of 10% or more—or approximately one every two years. Enduring these corrections is the price we pay as long-term investors striving to meet our financial goals. How we act during these time periods is what separates the rookies from the professionals and can dramatically alter how successful we are in achieving those goals.
We all tend to have a higher risk tolerance when markets are performing well. During a review with our financial advisor in the comforts of a home or office, we can easily imagine a world where stocks might be 10% to 20% cheaper on paper and how that may impact our financial goals. However, when we think about future risks in the markets, we tend to underestimate how we will feel in the moment. We lose sight of what else is happening in the world that is causing the markets to decline and how that might impact us personally. This year is no different, and the laundry list of reasons is long:
- The war in Ukraine is costly
- Inflation is the highest in 40 years
- The Federal Reserve is tightening monetary policy
- The supply chain is a mess
- Mortgage rates are rising at the same time housing prices are at all-time highs
- The pandemic is certainly not over
- Market valuations are too expensive (but looking better), and we are overdue for a reset
The bottom line is, there is always a reason for why we experience market volatility, and how that impacts us personally can create stress, fear, and anxiety. When we let our emotions take over, we naturally have an urge to do something about it. These emotional reactions can lead to mistakes that can reduce the probability of meeting our finance and investment goals. Below are common mistakes investors make during market corrections and steps we can take to help mitigate costly errors.
Mistake #1: Looking at the Market Daily
When headlines are scary, the daily moves in the stock market are volatile and unpredictable. Checking the market or your portfolio frequently will only heighten any fear and anxiety and may result in poor investing decisions. During difficult markets, it is important to remember that you have an entire team working for you at Lifeguard Wealth. We have designed your portfolio using decades of academic research to weather all types of market environments so you can have peace of mind. We are also here to take on any blame for when things do not go as planned. You should take advantage of the resources at Lifeguard Wealth and schedule a time to help refocus on your long-term plan.
Mistake #2: Deviating from an Investment Plan or Not Having a Plan at All
Do you have a written investment plan? If not, consider hiring an advisor like Lifeguard Wealth to create one that aligns with your goals, return expectations, and risk profile. The plan is a customized, long-term strategy meant to withstand multiple market cycles. If you have the urge to change your plan during a market correction, then have a conversation with your advisor and ask the following questions: Have my long-term goals changed? Am I still on track to meet those goals? If I deviate from my investment plan, how will that impact the probability of successfully meeting my goals? These questions will help reduce any reactionary emotions and shift your mindset back to the big picture.
Mistake #3: Trading More Frequently or Trying to Time the Bottom
Day trading and market timing strategies are automated systems that utilize algorithms and programmed rules designed to execute trades in milliseconds. This places the human day trader at a significant disadvantage. While the data supports that day trading or attempts to time the market are not additive to long-term returns, market corrections can be an excellent time to be a buyer. However, it is vital to have an investment plan in place so you are prepared to execute in the moment. As an example, a rebalancing strategy is one method that is highly effective for long-term results. This removes emotions from the equation and allows for a disciplined plan of attack during market downturns.
While your feelings play a vital role in determining the right long-term strategy for you, we cannot let emotions dictate our investing decisions, particularly during market corrections. This can lead to short-term mistakes that, left unchecked, can have negative impacts on your retirement goals. A disciplined investing approach based on facts, not emotions, is the winning formula.
The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.