Most of us know that one of the most important steps to build wealth over the long term is to invest our money, but the idea of investing, for many, is scary. The memories of the last financial crisis may finally be starting to fade, and anyone who remembers that time can tell you of someone they know who had their entire retirement accounts chopped in half. In fact, it was so painful people started calling their 401ks 201ks. Many people had to put off retirement because of the decline, and that’s if they are lucky to still have a job.
While stock market valuations are much higher now, some people are still concerned about what could be coming next. The economy may be doing better, but the headlines are as scary as ever. War, brexit, and the Fed raising interest rates too fast all seem to be just around the corner. In these types of conditions, it’s hard to remain calm when it comes to your money.
Before you panic, though, it’s a good idea to step back. Often, the solution is not to unceremoniously dump your investments, especially stocks. It’s better to have a measured response to the issue. Here are a few things you can do to in order to help you remain calm when you aren’t sure about the market:
1. Consider Index Funds
One of the biggest fears people have is that their stock picks will tank. If you are in this camp, it’s important to reconsider your investment strategy. One way to stave off concerns about what’s next is to invest in index funds. Yes, low cost index funds will drop when the rest of the market does. However, when the market recovers, these funds often do as well. You don’t have to panic, thinking that you will experience a permanent setback when you use index funds because a wide market index fund is a bet on the economy as a whole. When the economy recovers, index fund valuations will go up too. Take steps to consider index funds, and you are far more likely to have peace of mind. Over time, investors in these investments have been handsomely rewarded.
2. Take a Big Picture View
Remember that in the short term, markets are really volatile and impossible to predict. However, you will see that stocks tend to smooth out, and a trend line that slopes relentlessly upward develops if you “zoom out” and look at performance over time. Keep this big picture in mind. It’s hard, when things look dismal, to consider the big picture, but you need to try. Look to the future. As long as the fundamentals of your investments are solid, there isn’t much reason to sell. Consider the fundamentals before selling a stock or any other investment next time. If nothing has changed, except the market, there is a good chance that the investment will recover in time.
Consider the pain people felt in the dot com crash in the early 2000s and the financial crisis late in the same decade. Those two stock market crisis brought huge declines. Yet, those who hung onto their investments in profit generating businesses all did fine over time. It’s only those who speculated on all hype but no profits type businesses that crashed and burned.
3. Ignore Sensationalist Reports
It’s hard to ignore the financial media when its members are always screaming about the next catastrophe. However, you do need to try and tune out the hysteria. It’s too easy to get caught up in the hype. This suggestion applies to those investments that are being talked up, as well as those that are being talked down. Be wary of sensational headlines about imminent doom, as well as unstoppable investments destined to take off. Financial news isn’t called financial porn in some circles for no reason. Turn off the financial media, and you’ll be less likely to panic.
Do you have some suggestions for avoiding panic with your investments?
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I think too many avg. investors overlook or are too lazy to understand the advantages of selling covered call options against your longer term stock holdings.
I think that the only way to invest in stocks is a long term alternative. Despite of the fact, that we can use professionals, like those in mutual funds, the responsibility is always with us. So the only way is to study investing so much, that we have a picture, what stocks will profit long term.
Ignore sensationalist reports is huge.
Investors need to realize that the media needs eyeballs so they want juicy headlines. They are marketing to you, not giving real advice.
Hi Miranda,
Thanks for sharing this insight. I know how it feels of not being calmed especially during my first year of investment. But the only advise I am getting at is to stay positive and read stories from successful investor. As what I read from Warren Buffet, he never pulled out his investment easily even if stocks went nuts! Therefore, it is only a matter of taking risk for a greater good. There are also plenty of investing slack community that can help nowadays!
Great post!
We all need to determine if we are either investors or traders (CNBC). If we are investors then we are probable in it for the long term. If you then set your asset allocation between stocks and bonds/cash according to your risk tolerance then you won’t be as tempted to sell when the market goes down. If you are in it for the long term, then why react to short term fluctuations? To me it’s kind of that simple.
Investment can be scary. The cloud of uncertainty hanging over Europe is definitely worrying to all of us. In these times, it is important to stay calm and make precautionary decisions as far as possible rather than impulsive ones.
-Jean
The market drives me crazy with all of it’s ups and downs. I have a guy I trust handling my retirement account.
Do not believe every news that you hear or read. I ask around, especially my friends and former colleagues who are now working in financial companies and stocks trading.
People’s retirement accounts did not get wiped out because of the stock market. They got wiped out b/c their asset allocation was way too risky for being that close to retirement.
Invest in low cost index funds and change your AA appropriately as you get closer to retirement and you should be just fine
Lucky enough for me I have friends that work at financial companies, if I have questions they are there to help.
I know that my time horizon is about 40 years so I enjoy when the market goes down. It is an opportunity for my dollar coat averaging method to pick up some cheap discounted shares of my mutual funds.
Shut off the tv, never watch the market shows. They are selling their shows, and bad news sells. So guess what you will always hear about? The next bad thing coming! Even if it never will happen or is years away.