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What You Should (and Shouldn’t) Do When the Markets Drop

| August 27, 2015
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Late August brought a bad week for many investors. The Dow Jones dipped 1,000 points, the Nasdaq fell by 340 points, and the S&P 500 dropped 120 points. It was the worst week in several years for all three market indexes. These drops signaled the first market correction since 2011 and, as a result, many investors panicked.

While easier said than done, successful long-term investors know it’s important to stay calm during a market correction. Market volatility has increased in recent years and the media can often make it seem like the sky is falling. In reality, volatility does not hurt investors, but selling when the market is down locks in losses.

At Engaging Women in Wealth, we work with a number of women investors, and we understand the concerns they face in regards to the volatility of markets. As we experience market fluctuations, here are a few essential do’s and don’ts:

Do... Seek the Counsel of Your Wealth Advisor

Whether you’re new to investing or an experienced investor, it’s helpful to consult with an objective third-party. Human nature causes us all to act out of emotion when our accounts go down. As an independent firm, we put your best interests first. We seek to serve as a support system for our clients, helping women make informed financial decisions that aren’t driven solely by emotion. If you are uncertain about the markets or wonder if you should make a move, speak with your advisor first. Together, you can discuss what will make the most sense in terms of your immediate needs and long-term objectives. Sometimes, simply speaking with your advisor may help you feel more confident with your strategies and less concerned with the day-to-day market activity.

Don’t... Let Emotions Control Decisions

When the markets take a dive, many investors immediately panic. For many, their instinct is to sell, as they fear prices will continue to plummet. The opposite response is to take advantage of the low prices and buy, buy, buy. As Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.” However, it’s important to make sure the decisions you are making aren’t emotional reactions. Steve Schaefer from Forbes warns, “reeling markets offer buying opportunities, but snapping up shares just because they are beaten-down is no different than selling things just because they went up.” Think of it in terms of shopping. You wouldn’t purchase something simply because it’s on sale. It has to be something beneficial and of use to you in the long run.

Do... Take (Sensible) Action

While you don’t want to react emotionally, you don’t want to completely ignore the markets. Discuss with your wealth advisor about appropriate steps to take. Ultimately, you don’t want to abandon your well-crafted investment plan out of panic or greed. Based on your goals and portfolio, it may be best to stay the course. For others, there may be opportunities to make some adjustments and take advantage of the correction by buying stocks. While a stock market correction can be upsetting, remember that it also provides you the opportunity to re-evaluate your holdings and risk tolerance. You may determine that a stock that looked attractive months or years ago is no longer the best investment option. During your regular portfolio review with your advisor, you can determine what adjustments to make.

Don’t... Predict The Market’s Direction

The only thing we know for certain about the markets is that there will continue to be ups and downs. The recent stock market drop wasn’t a crash; it was a correction. These corrections can occur within any timeframe and can be caused by a number of different issues. Predicting what will cause the next correction and when it will happen isn’t possible. Rather than predict what will happen next, it’s more important to determine how you can position yourself for the next correction, whether that occurs in a few months or several years down the road.

August’s market correction wasn’t the first, and it won’t be the last during our economy’s recovery. In fact, Deutsche Bank’s research shows that the stock market, on average, has a correction every 357 days. Market corrections are an inevitable part of owning stocks. While we don’t know for certain when the next correction will occur, you can prepare yourself and may feel more confident in your plan by working with your advisor to craft an investment strategy that accurately reflects your risk tolerance, time horizon, immediate needs, and long-term goals.

If you have questions about creating an investment strategy or would like a complimentary review of your current portfolio, contact us today. We can help you evaluate your opportunities and current holdings and answer any questions you may have.

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