The first quarter of 2018 has delivered a clear reminder that the law of gravity remains in force and markets can go up as well as down. Intellectually, experienced investors know a certain amount of volatility comes with the territory and is nothing to panic about. But humans are emotional creatures, and it can be hard for us to ignore the twinges of worry that we often feel when markets reverse course.
Downturns can test investor resolve, sabotage otherwise solid plans, and just plain hurt. But experience and evidence are on the side of investors with a long-term outlook. Acting rashly is far more damaging to portfolios than maintaining rational resolve during market downturns.
Just as we prepare for any emergency by practicing how to avoid blunders, we can take steps to avoid costly mistakes when markets are in the negative.
1. Don't panic. It's easy to believe you're immune from panic when the financial sun is shining, but it's hard to avoid indulging in worry during a crisis. If you're entertaining seemingly logical excuses to bail out during a steep or sustained market downturn, it's highly likely your behavioral biases are doing the talking. Even if you only pretend to be calm, that's fine, as long as it prevents you from acting on your fears.