When the stock market trembles, fight your fear and keep investing

Posted at 7:53 PM, Oct 12, 2018

After eight months of steady gains, stock market volatility has again rocked investors this week, with a global sell-off triggered by the prospect of slower global economic growth and rising bond yields. The S&P 500 fell nearly 7% in six days, bringing the index down to levels last seen in July.

When stock markets tremble, the advice from financial advisors is simple: Stick to your investment plan.

That’s easier said than done. If your financial house is on fire, you want to fight the flames or flee as surely as if your actual home were ablaze, behavioral finance experts say. To stand back, watch and periodically throw more money on the bonfire is tough even for the most seasoned investor, let alone your average 401(k) holder.

“You’d think that a high-net-worth individual is more sophisticated, that they are not going to panic like an investor with $50,000 at stake? Not true,” says David Thomas Jr., founder and chief executive officer of Equitas Capital Advisors in New Orleans.

Still, Thomas says, “You can be smarter than your emotions, but that’s an acquired skill.”

Here are some ways to sidestep the natural emotional triggers that can be costly during the next market correction or crash.

Beware of ‘market crash PTSD’

The last bout of volatility was during February’s correction, in which the major indexes tumbled by more than 10%, troubling a market that in 2017 had enjoyed a five-decade low for wild moves. “We’ve been lulled to sleep in a low-volatility market for quite a while, which was terrific, but now it’s back — and that’s normal,” Thomas says. “Volatility does not equal recession.”

Sudden market turns have a way of stirring up memories of 2008’s Great Recession, the worst financial crisis since the Great Depression. Market corrections and recessions are inevitable, but there’s no reason to expect that a downturn of an equivalent magnitude is right around the corner.

“It’s like people have PTSD [post-traumatic stress disorder] from the credit crisis,” says Patricia Jennerjohn, a certified financial planner with Focused Finances in Oakland, California. “The market starts to shake, and everyone thinks: ‘Uh-oh, this is the big one!’”

“The crisis was traumatic for many people, so anytime something happens that reminds them of that, all those feelings come right back up,” Jennerjohn adds.

» Read more:  Stock market crash versus a correction

Ignore your portfolio’s peak

Humans are hardwired to feel drops in portfolio value more than equivalent gains, a phenomenon known as “loss aversion.” So when you see the value of assets below their peak, the urge is to make moves to stanch the loss by selling. But really,  the smarter thing to do would be to hold — or even to purchase some more of these beaten-up stocks, a practice known as buying the dip.

“One thing I constantly scold clients on: You need to look where you are at now versus where you started — don’t look at your peak,” Jennerjohn says. “If you look and see, ‘I’m down 2%,’ that’s the wrong perception.

“Look how much your portfolio has grown since you started — keep that in perspective.”

Tune out financial news, panicky ads

When global markets drop, wall-to-wall coverage by the financial media creates a sense of impending doom. “You’d think the world was ending,” says Wayne Maslyk, CEO of Great Lakes Benefits and Wealth Management in Sandusky, Ohio.

“In the past decade or so, especially with social media, news organizations have really figured out how to tease the amygdala,” the region of the brain that triggers the fight-or-flight response in humans, adds Thomas. “Everything is a crisis.”

To protect your portfolio — and your sanity — advisors recommend not watching daily moves, but instead checking in monthly, quarterly or annually.

Amid troubling news reports, investors also get hit with strident market pitches online. “They start to see more scary emails and pop-up ads on the internet; clients can’t seem to stop opening them,” Maslyk says.

“There’s always something touting, ‘The guy who predicted the [financial crisis] is now saying this’ — or to buy gold, or some guy’s stock-trading newsletter,” he says. “That’s what gets people to make the emotional, fearful decision to do something different and go off their plan. In many cases, they screw up and get hurt and it’s hard to rebound.”

Keep cash in the market

The return of volatility once again raises concern the stock market finally will descend into bear territory, defined as a drop of at least 20% from the most recent high. Even though there have been five slumps in excess of 10% over the past nine years, U.S. stocks still are in the midst of the second-longest bull market in history.

“People are wondering, ‘how long can this [bull market] last?’” Jennerjohn says. “It’s almost like a constant run of good luck at the gambling table and it’s eventually going to turn on you.”

“This scares clients from putting money in the market because they’re convinced the day after they put it in, there will be a 20% correction,” Jennerjohn says. “And then five months later it could have gotten an 8% gain if they hadn’t sat on the cash.”

During periods of volatility, in the long term it can pay to keep calm and invest on.

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