How to survive a stock market correction: Avoid doing these 5 things
In 2022, investors endured the worst start for the stock market since 1970, with the S&P 500 index falling nearly 25 percent in the first six months of the year. The index blew through “correction” territory – down 10 percent from the all-time high – and officially entered into bear market territory – down 20 percent.
The added pressures of runaway inflation, geopolitical conflict in the Ukraine-Russia war, surging oil prices and multiple aggressive interest rate hikes have investors understandably concerned about what will happen to their money in the year ahead.
But how can you survive a stock market correction or a bear market? Here are five crucial things to avoid when markets are flashing red.
5 things to avoid doing during a down market
Being successful in investing is often about what you don’t do as much as it is about what you actually do. Here are five things you’ll want to avoid so that you don’t sabotage your own portfolio when stocks turn south.
1. Don’t check your portfolio every day
Checking your portfolio every day can be a recipe for making emotional, short-term decisions — and those rarely work out well. Watching your portfolio fall seemingly every day is a strain that even great investors don’t want to bear, so reduce your exposure to this panic-inducing practice.
You’ll set yourself up to make better and more rational decisions if you don’t let yourself be bombarded with falling stock prices every day. Plus, you may even be able to take advantage of the situation, to zig when the crowd zags and take advantage of the panic.
If you must check your portfolio, do so at a regular period – say, weekly – though even longer may be better. You’ll do better if you keep your emotions and those of others out of your decisions.
2. Don’t get caught up in the moment
It’s incredibly easy to get caught up in a moment of panic and do something rash. The market’s panic will infect you easily (see point no. 1) if you let it. You’ll try to avoid losing money by selling right now at any price in order to stop the pain. It’s what psychologists call myopic loss aversion. You become so trained to avoid immediate pain that you’ll sacrifice all future prospects of gain.
Instead, it’s important to focus on the longer term and to keep your mindset farther out. Focus on the business rather than the stock, since stocks fluctuate a lot more than the actual business.
Those who sold during the downturn of March 2020 – statistically some of the worst days ever for the S&P 500, as COVID began to wind its way around the world – went on to watch the market rise steadily for nearly two years afterward.
3. Don’t sell and ask questions later
Because of loss aversion, it can be oh-so-tempting to simply sell and not look back. That might stop the pain right now, but you could well be hurting your long-term future by doing so.
Instead, it’s valuable to re-assess what you own and why. Are your stocks backed by well-run companies that have a bright future ahead of them? Or are they riskier assets from highly speculative companies or maybe cryptocurrencies that aren’t backed by anything?
Solid companies with strong future prospects will pull through this downturn, as they’ve done in prior ones. But there’s no guarantee that weaker companies or assets will. So, it’s best to understand if you’re investing in something for the long term or just here for a short-term trade. Then decide whether to sell, hold or even buy more while the market is lower.
4. Don’t forget your own personal financial situation
If you have a pressing need for your money as a retiree or soon-to-be one, you’ll want to carefully consider your investments as part of your financial plan. While investors with long investment horizons should probably do little or could even add more to their portfolios during a correction, other investors will want to assess their immediate financial needs.
One strategy for retirement investors is to take out only the funds they’ll absolutely need over the coming year. They’ll minimize the investments they’re selling and give the remainder a chance to rebound. Then in future years it could make sense to have a sizable cash cushion to allow them to ride out future downturns.
It can be a tough balancing act for those who aren’t working because they are often unable to take advantage of a market dip and add to their portfolio at what is often an attractive price. But you’ll have to balance your financial needs today against the need for money tomorrow.
5. Don’t say “you’ll wait until the market is safer”
“I’ll wait until the market is safer before I buy back in.” Many investors tell themselves this little fib as a way to soothe their conscience when the market scares them into selling. They justify their actions by saying that they’ll buy at a lower price later. And sure, sometimes they can.
But as often as not, the market rebounds before they’re able to buy back in. These investors are left having “bought high and sold low” and with prices having rebounded, they’re forced to buy at a high again. And they set themselves up for another “buy high, sell low” cycle.
Because it’s difficult — if not impossible — to consistently time the market, many experts recommend adding to it regularly in a practice called dollar-cost averaging. And one of the best times to start doing this is when stock prices are down from prior highs. That’s when stocks have fallen – not when they’ve already risen – but it’s also when most people are afraid to act.
Bottom line
Stock market corrections can throw many investors for a loop, so that’s why it’s pivotal to be able to respond in the way that works best for your long-term interest. Strip away sources of emotion from your decision-making and find the path ahead that fits your needs.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
