Originally posted on https://burneywealth.com/blog/strategies-for-dealing-with-market-selloffs/
***This is a repost from our blog back in December when we last saw market volatility. Today, concerns are centered around escalating trade tensions between the US and China. A trade war could be the catalyst for the next recessionor simply a negotiation tactic ahead of a trade deal. There is no way to know now but also nothing any of us can do about it. This post focuses on the things you have control over***
Bear markets happen.
Of course, no one likes seeing their investments lose value but knowing and expecting these things will happen is a necessary prior to investing in stocks. We’ve written on the topic of market selloffs routinely because market selloffs happen routinely.
By now, you’ve probably seen us offer evidence that market timing doesn’t work. Everything from why the old adage “sell in May and go away” is a bad strategy to how buy and hold beats “playing it safe” to the simple fact that for market timing to work, you have to be right twice. We’ve shared how future return expectations are higher after large selloffs (1) (2) (3) and how being out of the market during one of the top-10 trading days is disastrous for portfolio returns.
We’ve shown there are always headwinds in the market and we’ve written about them through the years. Investors who sold on US valuation concerns in 2014 missed out on the 41% gains that occurred since. Are you still afraid of China devaluing the Yuan in 2015? Or of the Fed’s end of Quantitative Easing? How about 2015’s collapse in oil prices and earnings recession? The point is there is always something to worry about and there are always headlines to capitalize on that fear.
For investors with a long enough time horizon, stocks offer higher average returns with less volatility than asset classes considered safer in the short-term, like bonds. The challenge is getting to that long enough time horizon. The Behavior Gap is real because long-term investing is hard. Study after study (Dalbar, Morningstar, Vanguard) shows that making changes to a long-term investment plan is detrimental to returns. Yet, investors continue to make these harmful long-term decisions to (hopefully) avoid short-term pain.
We’ve presented evidence on why keeping the faith is essential to successful investing and advised that the only way to achieve the returns promised by stocks is to expose yourself to every market panic. But we haven’t offered strategies on how to stay invested when times get tough.
Here are a few strategies that can help:
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