Down markets aren't fun. Volatility, market swings, and notable losses in portfolio earnings can be hard for any investor to stomach. Turbulent times like we're seeing today can even lead some investors to make big mistakes that, more often than not, make your portfolio worse off in the future.
Learn how to avoid these two common mistakes and use the down market to your advantage instead.
When you see a market falling, whether it's the stock market or the real estate market, it's easy to panic and want to sell. Fear over how much farther the prices could fall leads to more selling which creates more panic and then more selling. This vicious cycle is largely led by newer, inexperienced investors who are letting their emotions get the best of them and are forgetting the long-term outlook on investing.
Buying and holding for the long term allows your investments to recover from market volatility. Many of the stocks that are down 20% to as much as 70% today aren't down because of their performance; it's just concern from investors over what the future could hold.
The real estate market isn't immune to this, either. Talk of a housing market crash is flooding the news headlines, causing sellers to list their properties for fear that prices will fall. Some investors will certainly benefit from today's top-dollar pricing, but if you aren't in need of cash today, selling could be a big mistake for long-term wealth building.
Keep an eye on the stocks in your portfolio that are down, making sure their earnings continue to deliver as hoped and expected — but try not to sell as the market is falling. This will lead to losses when simply riding it out could create much greater earnings over the long haul.
2. Sitting on the sidelines
It's easier to sit on the sidelines when the market is unstable, but idle money is lost money. Inflation is at decades-high levels, meaning money sitting in a bank account waiting for the market to bottom out is losing its value every day it's not growing. By investing now and holding for the long term, investors can benefit from the rebound in the markets and, hopefully, outpace inflation over the long haul on an annualized basis.
The latest market dip, which put the stock market back into bear territory, was short-lived. Just two weeks later, the market rebounded, nearing April 2022 levels. Those who waited to buy stocks, hoping the market would fall farther, missed a major value-buying opportunity. Down markets are excellent times to buy quality investments because of their discount.
Timing markets is next to impossible. Whether it's the real estate market or the stock market, no one truly knows when things will soar or plummet. Rather than sitting on standby, look for value buys and income opportunities that can withstand the ups and downs of market volatility. When you invest for income over appreciation, it's easier to stomach the down times, and you'll have the cash on hand to rely on when the going gets tough.
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