Investing is a key strategy when it comes to building wealth over the long term. But as important as it is, a lot of people find it intimidating. Investing isn’t risk-free, which can often create worries for our clients—especially during an economic downturn.
If you keep a close eye on your individual investment accounts, you know why. During economic downturns, you might see the value of your portfolio plummet. And it can be terrifying.
When this happens, many people have the urge to make an emotional—not logical—decision and sell their investments. But this is a big mistake.
If you’re tempted to abandon your investments as soon as the economy starts to look dicey, pause and take a deep breath. Below we’ll show you why panic selling is a bad idea—and how approaching your investments with a long-term, level-headed approach can help you build more wealth over the years.
Emotional Decision-Making Doesn’t Work for Your Investments
Money is emotional. Anyone who’s ever felt a sense of guilt or pleasure when spending money knows this. When it comes to spending, your emotions can help you make financial decisions in line with your values. But when it comes to investing, these types of decisions can quickly derail your financial strategy. When investing long-term, you must leave your emotions out of the picture.
Why is it so important to avoid emotional decision-making? In short, your emotions during a market downturn—fear, panic, anxiety—cause you to want to do the opposite of what’s best for your portfolio. Emotional decisions don’t take your long-term plans into account. Instead, they only consider the present moment.
When you sell an investment because you’re panicking at the moment, you miss out on the opportunity for that investment to continue to grow. And even though it may not sound like a big deal, missing out on these opportunities can make a huge difference in your portfolio.
For example, if you invested $10,000 in the S&P 500 in 1999—and left your investments alone through 2018—you’d have ended up with just shy of $30,000 twenty years later. However, if you panicked and missed the best 10 days in the market during that same 20-year period, you’d have ended up with less than $15,000.
So, how can you avoid emotional decision-making? A long-term perspective is key.
Invest With a Long-Term Perspective
The key to a good investment strategy is thinking long-term and even looking back at history. If you look at data from any major market downturn over the last century, what happens after each?
A market upturn.
Yep—even though recessions can leave a lasting emotional impact, history shows that the market recovers. And these downturns may be shorter than you think—since the end of WWII, the average length of a recession was less than 11 months.
What does this mean for an anxious investor? When you’re tempted to sell in a panic, remember that the market has always recovered, on average, within a year.
Keep this long-term perspective in mind when creating an investment plan. Generally, you can afford to take on more risk the further away you are from retirement. Because even if your portfolio loses value during a market downturn, you’ll have plenty of time to let the market recover.
As you approach retirement, you’ll likely want to reallocate your investments so your portfolio is more conservative. Doing so will ensure that if the market takes a downturn when you’re a few years away from retirement, you won’t see a dramatic drop in your portfolio’s value.
Investment strategy examples
You can’t control the market, but you can control your investment strategy and the decisions you make. There are countless ways to invest, but here are a few strategies that can help you plan long-term:
- Index investing: This strategy allows you to invest in a diversified range of securities through a single, passive fund, usually at an affordable price. The goal of an index fund is to replicate the performance of a particular index.
- Dollar-cost averaging: Dollar-cost averaging is the process of purchasing investments consistently over time at a fixed cost. This strategy smooths out the cost of buying securities so when the market is down, you can get a bigger bang for your buck.
- Buy-and-hold investing: In short, this is the strategy we suggest to anyone hoping to avoid panic selling. Rather than trying to time the market, buy-and-hold investing means you buy investments intending to hold them long-term. This strategy relies on a long-term perspective.
These strategies, along with others, aren’t mutually exclusive. It may be worth talking with a financial advisor to determine which investment strategies will work best for you, your risk tolerance, and your goals.
4 Tips for Reaching Your Investment Goals (Without Panic Selling)
We can tell you again and again how important it is to avoid panic selling, but it also helps to have some practical tips to put into practice. Here are a few to employ right now:
1. Have a cash buffer.
When you’re trying to dig yourself out of debt, an emergency fund can keep you from falling back on credit cards. But an emergency fund isn’t just for keeping yourself out of debt, it can keep you from being tempted to cash out your investments, too.
Having a cash buffer on hand will prevent you from being tempted to sell your investments if you get into a situation where you need cash. Know how much money you need to have on hand to feel safe in case of an emergency, and turn to this buffer, instead of your investments, when needed.
2. Don’t use investing for short-term goals.
If you want to pay for a wedding, a house, or your kid’s college education within the next year or two, don’t invest that money. The market may take a downturn, and, when you need the money, it will have lost value.
When it comes to short-term deadlines, you can’t afford more time in the market for your investments to recover if they happen to lose value. Instead, only use investing for long-term (and sometimes medium-term) goals. And consider a high-yield savings account for short-term goals.
3. Disconnect from the media (and your investment accounts).
When all you hear and read in the news are anxiety-inducing stories about the bleak economy, it’s no wonder you’re tempted to panic sell and abandon your long-term plan. The doom and gloom are enough to make anyone want to pull out their cash and avoid the tumult. Similarly, checking your account balances during a downturn can be panic-inducing. So just avoid it altogether.
Instead, rest easy knowing you’ve planned your investments wisely, and temporary market downturns won’t disrupt your strategy in the long run.
4. Get professional financial planning help.
You can plan long-term, avoid looking at your accounts, and save up a generous cash cushion, but sometimes it’s worth the peace of mind to consult a professional, too. If you have any doubts about your investment strategy — or simply want a second opinion — a fee-only fiduciary financial advisor can help.
Whether you want to leave the strategy to a professional or you just need someone to talk you down from panic selling, it pays — literally — to have an advisor with your best interests at heart.
Ready to team up with a financial advisor to make sure your investment strategy is capable of long-term success?