Market volatility is a normal part of investing, and it can be tempting for investors to overreact when faced with a fluctuating stock market. Unfortunately, overacting to market volatility may lead to costly mistakes and negatively impact your long-term investment goals.
A historical perspective of the market shows us a pattern of bull and bear markets that may be tempting to investors. Why not try to time the market and avoid those short-lived bear markets? Wouldn’t that be more lucrative? Unfortunately, it’s not that easy. The truth is, accurately predicting movements in the market is nearly impossible.
When the market is declining, and the news is depressing, the urge to panic and “play it safe” can also be intense. Therefore, how an investor responds to this turmoil may dramatically affect his or her long-term performance.
Investors are more likely to find the courage to re-enter the market after things quiet down. Unfortunately, by this time, they’ve already missed much of the recovery.
Why Investors Overreact to Market Volatility
Investors tend to overreact to market volatility because of the emotions they experience. Fear, greed and panic are all very natural emotions. For example, fear of losing money may cause investors to sell their stocks during a market downturn, even though history has shown that markets tend to bounce back over time. On the other hand, greed may lead investors to buy stocks during a market boom, which can result in overpriced stocks that may later decrease in value.
Three Things to Remember About Maintaining Perspective
First, crises influence us to focus on the negative. The flood of 24/7 crisis news coverage can contribute to our anxiety about the economy.
Second, anxiety makes us more vulnerable to making investment mistakes that may damage our long-term results.
Third, consider working with a financial professional to help you maintain a long-term perspective through the crisis. It’s essential to have the support of a financial professional who can help you control impulsive reactions to market volatility and practice disciplined investing. In addition to helping you find appropriate investments for your financial goals, your financial professional plays a more crucial role by acting as a counter to the market’s mind games that may tempt even experienced investors.
While timing the market may seem tempting during times of volatility, doing so is impossible that may result in costly errors. Overacting to market volatility may lead to costly mistakes and negatively impact your long-term investment goals. Remember patience and disciplined investing may prove to be a winning strategy. This is why we are here to help and to provide you with the financial strategies and the support you deserve.
Investments are subject to market risks including the potential loss of principal invested. Past performance does not guarantee future results.