Screens flashing red is scary for anyone invested in stocks. Fearful news stories can alarm investors and lead them to do things not in their best interest. Are you considering freaking out, selling stocks and potentially marring your long term finances? Well, here are five panic-inducing behaviors best avoided:
- Focus on the short term – markets can go up or down a lot on any one day in most years a 3% or greater move happens several times. But over long periods, guess what the average daily change in the market is? 0.03%. If you keep your eyes glued to the TV, you probably think the market is a wild casino, no better than Powerball. But if you step back and focus on the long term, you can see that stock markets create wealth, over time, despite all the zigs and zags.
- Look for articles that proclaim doom – people have a natural bias to look for information that confirms their point of view. If the market declines and you read a headline like “Market Crash Will Rival 1987’s Massive Drop,” you can’t help but start to buy into the idea that bad times are ahead. But check the track record of whoever is forecasting a massive fall in the market. Chances are, that same person made a similar call last year or two years ago and was completely wrong. Sure, if one keeps on making the same prediction, one is eventually going to be right, but very few, if anyone, can routinely call when markets will go down.
- Sell your stocks because it feels good – no one likes pain, whether it’s physical or financial. Opening an account statement and seeing that you lost money hurts “if only I sold everything last month I’d be so much better off.” The problem is that almost no one is able to time when to get back into stocks. If the market climbs higher after you have sold and you are still sitting on the sidelines that is when the real panic starts to set in. At that point, you may never feel capable of getting back in, a potentially debilitating move.
- Falling for click bait – many popular news organizations now write headlines that are designed to create a psychological compulsion to click on the article (“click bait”). Headlines are often written to provoke anxiety because research shows that these types of articles are shared more than moderate spins. All those jilting headlines can make you think the world is coming to an end, when in reality, they are more based on marketing than substance.
- Convince yourself “this time is different” – stock markets, despite their historical tendency to go up more than go down, do go through corrections quite frequently. Over the last 115 years, markets have dipped 15%, or more, every two years on average. While it is certainly possible the stock market going down means the end of the world is upon us, if you’d thought that in the past, you’d be wrong.
If instead of panicking, you understand that market corrections come relatively often, that investing in the stock market over long periods of time has generally turned out quite favorably, that news media need to attract viewers to survive, you can set yourself up to weather a financial storm. Instead of fixating on the noise, try focusing on doing the things in life you want your money to help you achieve. If you do panic, you will not be alone, but you may come to regret any rash decisions you make to abandon your long term plan. (Past performance does not predict future results).