Yahoo Finance I’m a Financial Advisor: 5 Things You Should Never Do When the Stock Market Plunges
Stock markets are rallying again following three days of turmoil. While it’s normal to feel worried, financial advisors say not to panic about your money just yet.
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The Dow plummeted 1,000 points and the broader market fell 4% on August 6 due to growing fears about a recession, worries that the Federal Reserve has failed to act quickly enough and the rumblings that bets on AI may not pay off as much as previously thought, CNN reported.
As we continue to deal with uncertainty, here are five things you should never do when the stock market plunges, according to financial advisors.
Money mistakes the super wealthy never make - that you might be doing now.
Don’t Panic
“Don’t panic! Selling all of your investments at the same time after a large downward move in markets is rarely a good idea,” said Justin Zacks, VP of strategy at Moomoo Technologies Inc., an online trading platform.
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Downturns are common. Per Oxford Economics, drops in equity prices of 5% or more have occurred at least once a year for the past four decades, CBS News reported. Market corrections, or a decline of at least 10% from their highs, happened every one and a half to two years on average, the firm stated. Even if stocks decline 20% from their peak, it’s still normal and not a reason to panic.
“Instead, try to disassociate yourself from market emotions and create a rational plan,” Zacks said. “Reevaluate your financial goals, risk appetite and timeline for when you will need your money. Then slowly take action to realign your portfolio with those goals.”
Don’t Bury Your Head in the Sand
Checking your stocks too frequently can cause you to make impulsive decisions, which can potentially hurt your long-term financial goals. But ignoring it isn’t a good idea either.
“Ignoring market gyrations risks even larger losses,” Zacks said. Instead, he suggests evaluating changes to your portfolio more often and educating yourself on current market conditions and valuations. “Consider using a stop-loss strategy to limit potential losses and take some of the emotion out of your trading decisions,” he added.
Don’t Neglect Diversification
In other words, don’t put all your eggs in one basket. “If your investments are not spread out, a market drop can affect you more seriously,” said Erik Severinghaus, entrepreneur, angel investor and founder and CEO of software company Bloomfilter.
Severinghaus recommends diversifying your investments. “This way, if one investment goes down, others might still be alright,” he explained. “A well-diversified portfolio has more strength and can handle market troubles better.”
Don’t Double Down
One common piece of advice is to buy low and sell high. Some stocks have come down, but Zacks says you shouldn’t double down. “Buying more of a stock that is falling rapidly can be a recipe for disaster,” claimed Zacks. “There is a reason such a stock is falling so fast and if you do not fully understand the reason why, it is not a good strategy to increase your position.”
He recommends reducing your exposure to levels that are more appropriate to current volatility. “Only risk what you can afford to lose. These periods are not the time to use margin leverage.”
Don’t Forget Your Goals
Knee-jerk reactions can damage your long-term financial goals. “It’s totally normal to feel worried when you see your portfolio in the red and the headlines are all doom and gloom. But remember your goals,” said Claudia Valladares, director of client relations at 11 Financial.
But if you’re nearing retirement, you may need to make some slight adjustments. “If you’re planning to retire soon, it might make sense to tweak your strategy during a market downturn,” Valladares added. “But if you’re investing for the long haul, consider using this dip to your advantage by dollar-cost averaging. Stay calm, and stick to your plan — it’ll pay off in the end!”
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: 5 Things You Should Never Do When the Stock Market Plunges
