How Would You React To A Market Drop?

2018-01-27


The fear of a drop in the market is something embedded in most investors, especially with all of the uncertainty surrounding Brexit. The key is to not panic and stay focused on your own long-term goals. In the case of market corrections, it tends to affect short-term traders more than those with a long-term horizon. Corrections in the market are unpredictable, occur often and rarely last long[1].

Do not panic and sell[2]. Market dips are inevitable and are a fact of life when it comes to investing[3]. The economy naturally peaks and drops[1], and it can be difficult to remain at a state of mental clarity. “Keep calm and stick to the plan” says investment strategist Rory McPherson[4]. He believes investors try to be too smart based on past experiences or anxieties. As a general rule of thumb, making decisions in the heat of the moment is probably not the best idea.

Turn off the news. We are living in the age of fear, in which headlines are designed for us to click on[5]. Inaccurate opinion polls[6], studies and headlines designed to play on emotions and anxieties may have an effect on your own gut instinct.

In addition to taking a break from the financial headlines and charts, it might be a good idea to take a break from your own portfolio. Research[7] indicates that in times of volatility, people check their portfolio more, and the fear of losses increases. Fidelity studied which investors had the highest returns, and it was those who never logged in[8].

What matters to your investment is your outlook on the future. Remember your long term goals[9]. Perhaps reviewing whether your goals are aligned with the time horizon would help you put things in perspective[10]. In the case of a 30-year retirement plan, one drop in one of your investments may be a blip in terms of the overall picture. It could be an opportunity to diversify your portfolio, if it is not already diversified.

No one can predict what will happen next and trying to second guess the market could prove to be essentially gambling. Remember to stay in touch with your own personal goals, understand all of your investments, constantly learn and diversify according to changes in the market and your own interests[9].


Sources:

  1. Fool / 6 Things You Should Know About A Stock Market Correction
  2. WSJ / 5 Things Investors Shouldn't Do Now
  3. Forbes / Understanding A Market Correction
  4. Financial Times
  5. RT / US North Korea Media Scare
  6. Guardian / Inaccurate Opinion Polls Got Us Into This Mess General Election 2017
  7. Science Direct
  8. Business Insider / Forgetful Investors Performed Best
  9. Property Moose / Navigating Your Way Around A Long Term Investment Plan
  10. Betterment / Market Drop

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