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Whenever the market surges up or falls down, you’ll see news outlets analyze (and in some cases sensationalize) what this means to our economy and to investors.
Back when BP’s stock plunged after the Gulf Spill, some analysts were wondering if the company would go bankrupt, while others saw it as a buying opportunity.
We can look back and see how things played out, but in the middle of it, it was easy to be confused and overwhelmed.
So how do you know if you need to buy or sell when the market falls?
How to Invest in a Volatile Market
As you can see in the chart above, while the stock market is increasing over the long term, the are plenty of times where it’s volatile.
Ben Casselman wrote recently about the why selling during these times is a bad idea.
He does a fantastic job of laying out how rebounds have happened and will more than likely continue to happen (though no guarantees because no one can predict the market).
He also gave an noted:
Imagine two people who each invested $1,000 in the S&P 500 at the beginning of 1980. The first one buys once and never sells. The second one is slightly more cautious: He sells any time the market loses 5 percent in a week, and buys back in once it rebounds 3 percent from wherever it bottoms out.
At the end of last week, the first investor’s holdings would be worth $18,635. The second investor would have just $10,613. (For simplicity’s sake, I’m ignoring dividends, fees, taxes and other factors.)
Which investor do you want to be?
Ignoring the Noise
Finding the meaningful signals can be extremely difficult with all the noise out there. Media in all its forms can make us feel like we have to do SOMETHING now.
I wrote awhile back there are some ways you can cut back on the noise:
- Remind yourself of your plan. Have your reasons why you chose this accessible so you can refer to it when you’re tempted to chase a ‘hot tip’.
- Check the data yourself. News pieces tend to focus on the narrative or story, but that doesn’t give the whole picture.
- Be selective with your sources. Choose your investing sources widely and ask yourself, what is the credibility of this site or show? What is their goal and how do they make money?
Focus on Fundamentals
As simple as it may be tell you to continue investing, I know it can be difficult.
Though I’ve seen how disastrous emotional investing decisions can be to a portfolio, even I can be tugged into thinking that my money may be safer elsewhere.
Since we’re prone to having bad investing habits, one of the best defense (and easiest to execute) is to have your plan set up and your contributions automated.
If you’re already investing, check to see if you can go ahead and get your contributions automated if you have’t already.
Setting up our accounts was easy and the service has been wonderful with both companies.
Vanguard and Betterment offer you a way to invest effectively and efficiently with index funds and ETFs.
Once you’re set with your contributions, you can fine tune it by having a schedule to review and adjust your portfolio’s holding so you maintain your plan.
Thoughts on Investing
I’d love to hear from you – how are you doing with the market news? How do you ignore the noise? What tools help you focus on your long term goals?