What investors should (and shouldn’t) do in this market
Global markets are in a rout that some are calling reminiscent of the 2008 financial crisis.
Investors scarred by the recession may be cringing at the comparison and wondering whether to wait out the gyrations or run the other way. Here’s what financial experts say to skittish investors: Relax, because investing should be a long-term plan.
“Decades of books and academic textbooks tell us to sit still, and I always assume investors will eventually figure it out,” says Randy Bruns, a wealth adviser at HighPoint Planning Partners in Downers Grove, Ill. “You’re either misinformed or foolish if you don’t respect the fact that markets can be violent at times.
The S&P 500 was down about 2.5% Thursday afternoon, to about 1,945. On Wednesday, 433 of the 500 stocks posted declines after Apple shares and the price of oil fell. But Bruns says if this degree of volatility matters to an investor, it’s a sign that perhaps he or she has too much short-term money in the stock market.
Allan Roth, founder of Wealth Logic LLC, an investment advisory and financial-planning firm based in Colorado Springs, Colo., says investors should remember several key points: Nobody can predict what the market is going to do. “When stocks are up, we all think we can take a ton of risk,” Roth says. “They go down, we want to put all the cash under a mattress.”
But people shouldn’t do that, particularly if their portfolios are balanced, which can help investors feel more calm when the market swings. And for those with extra cash, slight drops in the prices of equities can be a smart time to buy.
Last year, volatility was below average, he says, so investors should have expected the market to take a turn south eventually.
Investors should use this time to remember that a balanced, diversified portfolio can help investors feel more calm when there are swings, he says, and called recent movements “peanuts” compared to when the market plunged more than 50% during the financial crisis.
“Look at what you did in 2008, and if you panicked and sold in 2008, you’re likely going to do the same thing again if it does turn out to be a real bear market, and you probably don’t belong in stocks in the first place,” Roth says. The market clawed its way back from the recession and topped 2007 highs in 2013, and reached several records last year — another reason why experts say investors should consider their long-term plans and goals.
Investors should remember the “10 bear market truths,” with the first being that sometimes, stocks go down, according to A Wealth of Common Sense, a blog run by Ben Carlson, the director of institutional asset management at New York-based Ritholtz Wealth Management and author of an investing book by the same name.
“Most investors mistakenly assume that you make all of your money during bull markets,” Carlson wrote. “The reason so many investors fail is because they make poor decisions when markets fall.”
So here are the cliff notes:
1. Don’t panic and cash out your 401(k) based on a few days’ trends.
2. If you have extra cash, and are willing to ride out the market, experts say it could be a good time to invest more money.