What to Do and What to Avoid Following a Stock Market Plunge
The stock market plunge on Monday likely has many investors wondering what should be their next money move.
How does this impact investors?
· It can be unnerving for investors at any level because it causes uncertainty.
· There is typically an emotional response to volatility, which can lead to knee-jerk reactions and rash decisions like pulling out of the market.
· In their 2019 Retirement Guide, JP Morgan studied the impact of pulling out of the market and missing the best 10 days in the market. During a 20-year period from Jan 1, 1999 and Dec 31, 2018, if you missed the top 10 days in the market, your overall return was cut in half from 5.62% to 2.01%.
· Studies in behavioral finance have revealed the following biases that impact investors performance :
Loss aversion – the idea that the pain in investment losses is greater than the joy of investment gains.
Herd mentality – the tendency for investors to follow trends set by larger groups of investors Hindsight bias – the “I knew it would happen” attitude
What should investors do?
· Meet with your investment advisor and review your portfolios. Think about your goals and your timeframe for your investments – are they short, mid, or long-term goals?
· Reevaluate your risk tolerance. Different investments such as stocks and bonds have different levels and types of risk. They react differently to different market conditions. In the event markets take a downturn, ask yourself how much of a loss can you tolerate.
What should investors NOT do?
· Avoid “market timing”. Making short-term changes by trying predict market performance can have a negative impact on investment returns.
· Avoid chasing trends. It’s tempting to make decisions on “perceived” trends but it’s important to realize that past performance is not indicative of future results.