The most important rule when you’re in the teeth of a tough market could very well be: "Stop! Do nothing!"
One of the biggest investment mistakes investors traditionally make is withdrawing their money at the exact wrong time. Just consider this: in late 2008 and early 2009, more investors pulled money out of mutual funds than at any time in history, according to the Investment Company Institute. Guess what? That turned out to be the bottom of the market. The long bull market that we have been in started right after that.
Here’s some advice on how to respond to the current market volatility. The key is to keep your nerves of steel and not overreact -- and if you follow that guideline, you might be able to turn this short-term volatility into better returns over the long-term.
• Open the envelope. The first step to being smart in this market is opening your paper statement, or checking your online balance. We see a lot of investors who act like ostriches, burying their heads in the sand. But what's happening in the headlines isn't necessarily what's happening in your portfolio. If you've been smart about designing a portfolio that fits with your own risk tolerance, you might be doing better than you'd guess.
See our interview with Jon Chevreau for more advice on market volatility.
• Remind yourself of your investment horizon. If you're comfortable that you have the right amount invested in stocks, bonds and other investments to meet your long-term goals of 10 years or more, then it's fine to leave it all alone. Stocks will go up and down: the point is, that they historically have gone up in the long run.
• Remember the basics and rebalance if it's called for. Investment services and wealth managers will do this for you. If you're managing your own account, you should be rebalancing, either based on time (once a year or so) or based on swings in the market. If you rebalance now, you'll automatically be selling high and buying low, which in the long run will help your portfolio.
• Take a close look at your investing goals. This could also be a good moment to ask yourself if you need to change what your portfolio looks like. If this roller coaster ride is making you so nervous you can't stand it, you could begin to gradually diversify into less volatile investments, like bonds. But give yourself time: the goal here is not to panic and sell. That's how investors lose money. The goal is an investment portfolio that helps you reach your goals while letting you sleep easy at night.
• Change investment advisors. If your portfolio has fallen more than the rest of the market or more than you would have anticipated, ask your advisor why. If he or she doesn't have a good explanation and hasn't prepared you for actual volatility in your portfolio, then it might be time to consider moving on.