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.