If you're like most non-professional traders, these kinds of wild market swings — down 635 Monday, up 430 Tuesday, down 400 Wednesday -- can be gut-wrenching, confusing and downright scary. (Rest assured, many professionals feel the same way - they just don't admit it.)
For those of you feeling paralyzed by the panic, here are some time-honored rules for a seesaw market:
If You Can't Take the Heat, Get Out: As my Breakout colleague Jeff Macke likes to say, if the market is keeping you up at night, you shouldn't be in it. This is particularly true for people at or near retirement age; you simply don't have the time (or income stream) to make up for big losses, a hard lesson many aging Baby Boomers learned in 2008. The same rule applies if you have funds in the stock market earmarked for a specific event in 5 years or less, like a house purchase, wedding or college tuition.
Contrary to what financial advisers tell you, there's no law stating your money has to be in the stock market, just as, contrary to what financial advisers tell you, there's no guarantee stocks will perform well "in the long run."
Don't Panic: If you don't need the money in your retirement account in 5 years or less, you're better off sitting tight vs. cutting and running. Unfortunately, many investors simply can't take the pain and are doing just that.
Transfers in the 4.7 million 401(k) accounts monitored by consultant Aon Hewitt exceeded $1.6 billion on Monday, more than three times the normal level, ABC News reports. "All of the assets moved Monday were taken out of stock funds and invested primarily in bond funds."
Historically speaking, retail investors get scared and sell out of stocks at important market bottoms. Pulling out after a big decline means locking in those losses, a mistake many investors compound by turning around and buying assets that may already be at inflated prices, such as gold and Treasuries in the current environment. That's why Wall Street pros refer to us as "the dumb money."
Have a Plan: Sometimes the most
boring advice is the best advice.
Investors who have previously established set patterns of portfolio rebalancing, diversification of investments and long-term goals for their money tend to do better -- both emotionally and financially -- during periods of dramatic market upheaval, says Liz Ann Sonders, Charles Schwab's chief investment strategist.
Learn from Your Mistakes: As of July 1, 80% of workers in their 40s and 50s had more money in their 401(k) than they did in 2007, meaning they'd recouped the losses from 2008, according to data compiled for AP by the Employee Benefits Research Institute. After Monday's 6.66% decline, that figured had dropped to 64%, suggesting a lot of investors were just waiting to get back to even after 2008 but hadn't changed their behavior.
Just as refusing to open statements from your broker or 401(k) administrator doesn't count as "financial planning," neither does "hoping and praying" the market will come back.
Nobody knows how much longer the current market squall will last or how much lower stocks will go before it ends. Then again it's quite possible the selloff ends today (or tomorrow) and stocks will return to their rallying ways. What can be said with near-100% certainty is this won't be the last time the stock market embarks on a heart-stopping decline.
So sometime when the market's closed or (ha-ha) quiet in the next few days, take a minute to ask yourself a few questions:
- Am I doing anything different today then I was doing before the market crashed in 2008…or 2000?
- How much volatility can I really stomach and how much money can I really afford to lose, even if just on paper, even if just temporarily? In other words, what is your risk tolerance?
- Can I really do this myself? If the answer is "no," then you're much better off finding a financial adviser. A good one can help you navigate the stock market's highs and lows; he or she won't promise you the moon, and the fees paid will be well worth your piece of mind and your bottom line.
In the end, the best advice anyone can give you is this: Investor, know thyself…and proceed accordingly.