So far this year, the S&P 500 has taken us on a nice ride: year-do-date, it is down about 2%. But during January, the index looked like that first big drop on the coaster, and it's spent the past few weeks, since the middle of February, chugging back up the next big hill.
The nature of the market is to go up and down. The important thing to know is that over time, it has gone up more than it’s gone down. Unlike in an amusement park, the market is a roller coaster that actually takes you some place, and you can expect that if you stay in the market for at least five or 10 years, the end will most likely be higher than the beginning.
I've talked in this column about how important it is to stay invested when the market is volatile. But that's harder than it sounds: the human brain has a great capacity to rationalize. For instance, we don't always realize when an emotion like fear is causing us to wait to start investing -- one of four major mistakes I see investors make in roller coaster markets:
Selling losers. It's tempting to sell the funds or portfolios that aren't doing well during a down market. But selling a loser guarantees a loss. You're probably much better off holding on until your regular rebalancing comes around. Remember, the point of rebalancing is to sell winners and buy losers. As long as you have invested in broad-based index funds, the laws of mathematics mean that today's loser is likely to be a winner some time in the future. Just wait.
Sell riskier investments. You might be thinking to yourself: this market is making me so uncomfortable that I can't stand it. Let me tamp down the risk in my portfolio. I don't need this headache. If you can't sleep at night, a lower risk portfolio might be the right choice – eventually. But I urge you to wait until you have thought through that decision. Over long periods of time, a higher risk portfolio is more likely to deliver higher returns.
Increase cash. One way or another, investors find ways to increase their cash during markets like this; sometimes they sell, or stop their regular investing, or sit on a lump sum they've received. Unless you need the cash within about five years, there's no need to change the strategy and the decisions you made about your investments.
Waiting to invest. The most common mistake I see is waiting to invest. Volatile and down markets historically have been good times to invest. You probably won't be lucky enough to invest at the exact bottom, but you know you're not investing at the top, either. If you have a lump sum, don't allow the headlines to distract you from getting into the market. The most important thing is to get on the roller coaster as soon as you can -- over a long enough course, it will pull you up the hill.