Market Declines

MANY INVESTORS GROW exuberant as share prices climb and fearful when they tumble. But to be a successful investor, you need to reverse those feelings, so you stand pat during market declines and, better still, seize the opportunity and invest more. That’s tough to do—but these strategies may help:

Before selling stocks, talk to someone. That someone might be your spouse, a friend or colleague. Don’t just talk about why you are fearful now. Also discuss why you’re inclined to ditch the strategy in which you had so much confidence just a few months earlier. As you try to articulate what has changed, you may realize that not much has.

Think about value. Stocks aren’t just pieces of paper or notations on an account statement. Rather, they represent partial ownership of corporations that often have growing profits and pay regular dividends. When share prices fall, stocks become better value relative to those profits and dividends—and the rational response is to buy more, not sell.

Look at the big picture. Your stock portfolio is likely a small part of your total wealth. While your shares are falling in value, your other assets—including your bonds, your home and your income-earning ability—may be more valuable than ever.

Force yourself to rebalance. You should have a target percentage for your portfolio’s allocation to stocks. A market decline will likely leave you underweighted. That means you ought to buy stocks as part of your regular rebalancing program. In fact, if the market drops severely, you may want to rebalance immediately, even if your next scheduled rebalancing is months away. If the market continues to fall, you can always rebalance again.

To read more about investors’ mental mistakes, rebalancing and portfolio building, check out the investing chapter.

Next: Pricey Markets

Previous: Starting to Invest

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