Javier Snchez Mingorance / EyeEm
Wild swings in the stock market may have you itching to make changes to your portfolio.
Yet any expert will tell you: You shouldn’t let your emotions drive your investment decisions.
“That vacillation between excitement and panic — that is what hurts people financially,” said financial psychologist Dr. Brad Klontz, associate professor of practice in financial psychology and behavioral finance at Creighton University Heider College of Business.
The market dropped again on Tuesday, a day after a huge comeback rally that saw the Dow Jones Industrial Average post its biggest percentage gain since March 2009. Last week, the market dropped more than 10%, the biggest weekly decline since October 2008, thanks to fears over the coronavirus.
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Financial advisor Mitch Goldberg, president of ClientFirst Strategy in Melville, New York, is reminding his clients that the ups and downs of the stock market are a normal part of the investing journey.
“It’s what you do before a plunge that counts, not the hasty reactions that come during and after, when you have no time to think,” he said.
While market experts said they didn’t see evidence of panic when the market dropped last week, it’s normal for people to feel panicked in these types of situations, Klontz said. It’s the way the human brain is programmed, with our emotional brains bigger and more powerful than our rational brains, he explained.
“Go ahead and panic,” said Klontz, who’s also a certified financial planner. “Don’t panic about the fact that you are panicking.”
In other words, acknowledge your emotions — but don’t act on them. That goes for whether you want to sell during a big drop, or buy in during a surge.
It may be easier said than done. Here are some techniques to calm your emotional brain so you can make rational decisions.
Take deep breaths
Consult with an expert
Consulting with a financial expert will not only help you evaluate the accuracy of your thinking, it also gives you something else you need: time.
If you can’t afford a financial advisor, at least speak to somebody before you make a decision, he added. As long as they are not also panicking.
“The goal is to put some time between your impulse to act and your behavior,” explained Klonz.
“If you can put some time in between those two things, you are more likely to calm down your emotional brain, engage your rational brain and make a good decision.”
Consulting with an expert will also give you an opportunity to reevaluate your approach to investing. Perhaps you are taking too much risk or your portfolio isn’t as diversified as it should be.
Remember the past
When the stock market dives, remember that this isn’t the first time it’s happened.
“The stock market has overcome so many obstacles,” said Goldberg, pointing to 9/11, the Great Recession and the market crash of 1987.
“What happened each time? The stock market recovered and claimed new highs.”
In fact, he thinks it is the younger investors who have only witnessed a bull market who are more likely to become emotionally charged.
“They never had this experience,” he said.
A stock market drop actually benefits younger investors, since it gives them an opportunity to buy in at lower prices and hold for the long haul. Just make sure you are still making rational, well-thought-out decisions.
If you are closer to retirement, it becomes trickier, since you will soon have to start making withdrawals from your retirement account.
Klontz suggests remembering that even if the stock market drops, it doesn’t mean your entire portfolio did. Take note of the percentage of stocks, bonds and cash you have in your portfolio. If you only have 50% in equities, which are typically more volatile, your panic may subside by half, he said.