Four Reasons Not to Overreact in the Current Market

Written by Nickel - 6 Comments

Has the recent market turmoil jangled your nerves? If so, you’re not alone. It’s not easy to sit still and watch your hard earned savings evaporate day after day. If you’re having trouble sticking to your investment plan, take a look at Vanguard’s list of four reasons not to overreact.

Reason 1: Market timing is a losing strategy

While getting out of the market until things settled down sounds great in theory, it’s incredibly difficult (if not impossible) to effectively time the market. The performance of the stock market can change very quickly, and rallies often occur suddenly, and over very short periods of time. In other words, it’s likely that you’ll miss any sort of rally if you sell on the way down in hopes of limiting your damage.

Reason 2: Investors have been rewarded for taking risk

You’ve heard it before… With risk comes reward. If you want higher long term gains, you have to run the risk of larger short term losses. Ultra-safe investments don’t offer high returns. That’s just the way it works. Of course, you can (and should) mitigate your risks by diversifying your investments.

Reason 3: Playing it “safe” can lead to a shortfall

While high-yield savings accounts, money market funds, CDs, and Treasury bills are good options for your short-term financial needs, they’re not suitable for the bulk of your long-term investments because their returns are low. If your investments don’t outpace inflation over time, then you’ll lose purchasing power.

Reason 4: Emotional decisions often lead to regrets

All of these ups and downs make it incredibly hard to focus on the long term. While it’s tempting to sell (or buy) on the heels of a major swing, you’ll likely end up regretting the move in the long run. This is part of the reason that I’ve intentionally avoided having money in an online brokerage account over the past few weeks. While I’ve been tempted to go bargain hunting for downtrodden stocks, that’s just not a part of our plan. Instead, we’re sticking to regular investments, low cost index funds, and well diversified holdings.

Source: The Vanguard Group

Published on October 14th, 2008 - 6 Comments
Filed under: Saving & Investing
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About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

Comments (scroll down to add your own):

Definately do not do anything drastic! Selling now is probably the worst thing that you can do. I’m no economist, but i do believe the Dow will be back around its all time high within the next 2 years.
Comment by Benjamin — Oct 14th 2008 @ 7:43 am
In my opinion, this market is a once in a lifetime buying opportunity for great financial stocks.
You don’t have to take my word for it, but I’m putting my money where my mouth is.
I’m currently accessing my capital and will be starting positions in Canadian bank stocks (RY, BNS, and TD) in November and December of this year.
Comment by Tyler @ Dividendmoney — Oct 14th 2008 @ 10:22 am
Agreed with Dividendmoney. I’m a new investor, and I think now is the time to get in if you haven’t before. One thing for sure is our economy will rebound to a better position than where it is at right now.
Isn’t that the idea anyway, get in for the long haul, buy low and sale high.

Caleb
Comment by Caleb Nelson — Oct 14th 2008 @ 3:14 pm
Bah, humbug!!! I can time the market, every day from 9:30am-4pm. lol
Comment by Tim — Oct 14th 2008 @ 6:56 pm
Myth #1: You don’t have to being invested in the market 100% of the time to be in it for the long term. Market volatility as measured through the VIX is a great indicator to let you know when to get in and when to get out of the market.
Comment by Cheaplee — Oct 14th 2008 @ 7:28 pm
It’s definitely a trying time in the financial world. My parents came seeking advice regarding their retirement funds, as a few of their friends had pulled money out and put it in savings accounts and are keeping it there until the markets rebound. The problem with that (beside the obvious penalties), is that the market is just so difficult to time. I know losing 20% in a week is awful, but if you pull out, the market might bounce back 30% and you’re in a worse position than you started.
Comment by Nick — Oct 16th 2008 @ 8:07 pm

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