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February 17, 2016

The Do’s And Don’ts Of Market Volatility

by Team Rowling
The stock market is going crazy. When it bumps up, we’re all happy. When it drops, especially more than one day in a row, we panic. We can’t control the market; all we can do is react – or not. Rather than act rashly, let’s take a look of what you should or shouldn’t do when there is a market downturn.

Rowboat on tranquil water during sunset

Do: Trust in the long term.

If the market was always going up, there would be no risk – and you’d be getting bank account interest rates. The reason you will be rewarded in the long run is because you’re willing to accept volatility in the short run. Historically, two-thirds of the time markets will be up and one-third of the time they’ll be down. As much as the media “Chicken Littles” broadcast that the sky is falling, periodic downturns are normal.

Don’t: Change your strategy or sell out.

Your diversified asset allocation strategy will help you achieve a solid long term investment return. Diversification means that, in general, your portfolio will not go up as much as the S&P in a bull market and it won’t decline as much as the S&P in a bear market. In other words, your portfolio will tend to move in the same direction as the market, but the swings will be less extreme. If you try to outsmart the market by guessing when to get out and when to get back in, the odds overwhelmingly say you will guess wrong. In fact, studies have been done comparing what investors do on their own vs. how they do with a qualified investment advisor. According to Dalbar, average investors consistently underperform – often not even matching inflation – because they jump around. Don’t lock in your losses by selling and don’t try to beat the market. You’ll only set yourself back.

Do: Maintain your allocation.

You (we) should continue to do what your strategy needs: rebalance. Every time you rebalance, you’re selling what’s higher percentage-wise and buying what’s lower. In other words, in downturns, you’re taking advantage of bargains. Think of yourself in a grocery store. When grapes aren’t in season and prices are high, you don’t buy grapes. When there’s a sale on canned tuna, you stock up on tuna. The average investor’s emotional reaction to the stock market is to invest more when the market is up (buying the expensive grapes) and to bail when the market is down (missing the opportunity to buy tuna at a discount). In fact, a down market is the perfect time to add to money to your portfolio.

Don’t: Make yourself crazy.

The TV news and “experts” in the media are there to create ratings. If every report said “stay the course,” how would that impact ratings? Sensationalism sells. So, what you read and hear will always be extreme – aimed at causing either euphoria or panic. Your best plan of action is to ignore the talking heads. Also, don’t look at your portfolio balance every day. There’s no point!

Do: Harvest tax losses.

When the market drops, we have an opportunity to recognize tax losses, while still keeping your portfolio fully invested. Building up a pool of tax benefits will drop your tax bill this year and maybe even next year.

Downturns aren’t fun, but they are normal. Stay the course!

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