The Psychology of Wealth: How to Stay Calm When Markets Panic
The stock market is a great wealth builder over the long run, as long as you can resist panicking during downturns.
Dips in the market are normal, but how investors react to those dips can hurt or harm their portfolios. The best investors stay calm when markets are volatile, and these financial habits can help you stay the course.
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Have a cash buffer
Before you invest, it’s important to have an emergency fund that can cover three to six months of your expenses in case of the unexpected, like job loss or a surprise bill. Knowing that you can cover the essentials can help you stay calm when you see red in your investment portfolio.
For some investors, it makes sense to have even more cash on hand. Retirees, for instance, may want to have a three-year cash buffer, since their time horizons are shorter than those of younger investors and they have less time to recover from market downturns.
You can put your funds into a high-yield savings account so that it’s still earning some interest.
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Reframe ‘losses’ as ‘discounts’
You probably don’t complain when your favorite items go on sale at the mall, so think of a market downturn as stocks going on sale. Dips present buying opportunities.
If you continue to contribute to your retirement savings accounts and invest in your brokerage account when prices fall, you’ll be getting more stocks for your money.
Consider your time horizon
You should think of money you put into the stock market as money that’s allocated for mid- and long-term goals, not the short term.
Ask yourself if you need this money in the next five years. If not, then it likely makes sense to invest in the stock market and stay the course when the market drops. For many savers, the time horizon for long-term goals like retirement can be 20 years or more.
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Automate your investing
If the market drops and you panic, you might be tempted to hold your cash on the sidelines until prices recover. But that means you’re missing out on the market recovery.
Set up automatic transfers so a portion of each paycheck goes to your investments. If you have an employer-sponsored account like a 401(k), you’re probably already doing this. Automating your investing can take the emotion out of it, and removing emotion can help you avoid panicking.
Don’t constantly check your portfolio
Turn off the news, log out of your brokerage account and focus on non-financial activities to keep your mind off short-term panics.
You can’t control or time the stock market, and obsessively checking your portfolio won’t help. Instead, focus on what you can control: Having a cash cushion and investing for the long term.