The most important critical thing you should do right now is to stay invested.
The markets dropped 30% over the last 4 weeks, and the world is gripped by the fear of a global pandemic. Needless to say, we are all in a heightened emotional state.
And while in this heightened state, we are very susceptible to make impulsive, emotional decisions with our money (which always turn out to be bad decisions).
To protect ourselves from ourselves, there are 3 things to do right now – stay invested, rebalance and harvest tax losses. Of those, the most important (and hardest to do) is staying invested.
What not to do
Avoiding pain is part of our human DNA. If something hurts we want it to stop.
That’s why our instinct is to sell everything and go to cash. It will stop the pain (or at least keep it from worsening).
But just like chasing down atomic buffalo wings with a glass of water, it’s the worst thing you can do.
Here’s why
Our instinct to sell kicks in only after we’re already feeling the pain, which means the market has already dropped substantially.
So we sell everything. Go to cash. Stop our pain.
Problem solved.
Now what?
But we’re no dummy. We know the market will rebound eventually. So our plan is to “get back in once it stops falling.”
Great in theory. Impossible in execution.
When?
When do we actually get back in?
After a month? After the headlines change? After it drops another 10%? After it gains 10%? When our crystal balls says so?
The truth is we don’t know where the bottom is. No one does.
But while we’re in this heighted emotional state we’ll err on the side of caution. We’ll disregard market upturns as false positives, sit on our hands and wait. And wait. And wait.
Then one day we’ll look back and realized we missed the rebound.
The hardest thing
The hardest thing to do during market downturns is nothing. We crave a sense of control. We want to stop the pain. It’s human nature.
But the only surefire way to survive market downturns is to stay in the market.
Stick your head in the sand. Don’t look at your portfolio balances. You’ll keep your heightened And know that this too shall pass.
