5 Common Mistakes Investors Make When Markets Are Volatile
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Mistakes are much easier to make when you're stressed, and a volatile market is certainly stressful.
Investors have experienced a lot of market ups and downs this year. The S&P 500 — a benchmark commonly used to measure the performance of U.S. stocks — fell by about 20% in the first half of the year, then mounted a comeback in the summer before declining again into the fall. The index is now up more than 5% for the month, but still down around 20% for the year.
Experts say the end of 2022 will likely remain volatile amid recession concerns and the Federal Reserve's continued interest rates hikes. And while market swings are understandably nerve-racking for investors, if you're investing for the long term, financial advisors say you should try not to panic about short-term stock trends.
To stay on the right track toward your investing goals, it’s crucial to be disciplined and level-headed during periods of stock market volatility. Of course, that's easier said than done, and many common investing mistakes can be even more likely to happen when the markets are really volatile.
Here are five common mistakes investors make when stocks are volatile, and how to avoid them.
1. Selling prematurely
When the market is tumultuous, investors often make the mistake of selling low, says Thomas Belding, financial advisor at Belding Financial Planning in Chatham, New Jersey. Falling stock prices give some investors the instinct to pull their money out of the market to mitigate losses.
But exiting the market in a panic can get investors in trouble because then they miss the rebound, Belding says.
On the other hand, investors are tempted to buy when the market is on an upswing.
“But when you do that, you may be paying a premium for getting back in,” Belding says.
By holding on to your investments, you can ideally take advantage of the long-term upward trajectory that stocks have historically demonstrated.
2. Worrying about the short term
It’s been a bad year for stocks. But if you were invested in the market in 2020 and 2021, you likely saw your account balance grow.
The S&P 500 ended 2021 up 27%. And history tells us that stocks will likely recover from where they are now. So investors don't need to panic every time they see red, says Michelle Soto, a financial planner at Cerity Partners in Redwood City, California.
“The top mistake investors make in volatile markets is to focus on short-term doom and gloom," Soto says. Doing so can make you vulnerable to investing mistakes.
The stock market has risen fairly consistently since the 2008 crash, which is why you may not be accustomed to scary market downturns, but bear markets are inevitable, Soto says.
3. Ditching your worst-performing investments
When markets are volatile, some assets can perform far worse than others. For example, technology stocks are having a disappointing year. The tech-heavy Nasdaq Composite is down by around 32% this year while the S&P 500 is down by just 20%.
While it may be tempting to give up faith in your investments just because they are underperforming at a moment in time, it can also be a mistake, says Andy Baxley, senior financial planner at the Planning Center in Chicago.
“The key to success is to understand that all these things are cyclical,” Baxley says. “The thing that performs outrageously well today may very well be the underperforming asset class tomorrow.”
Just look at tech again: Those stocks may be down now, but they were some one of the biggest gainers during the pandemic.
4. Deviating from your investing plan
While it’s tempting to change your investing strategy when things aren’t going well, financial advisors say that doing so can be ill-advised.
People often make the mistake of moving their money around too much in response to the performance of stocks, says Joel Mittelman, president of Mittelman Wealth Management in Andover, Massachusetts. He recommends instead trying to avoid worrying about what day-to-day stock market news means for your portfolio.
Investors run into trouble when they “listen to friends at the bar or the golf course” who think they know how to beat the market, instead of sticking to their thought-out plan, he says.
“Ironically, during a period of extreme volatility is exactly when you need the discipline and structure of some investment plan, and unfortunately, that's often when people throw the plan in the garbage,” Mittelman says.
If you don't already have an investing strategy, now may be a good time to come up with a plan that aligns with your goals, timeline and risk tolerance.
5. Overexposing yourself to risk
If your portfolio isn’t aligned with your risk tolerance, there’s a chance you can get burned by market volatility.
Determining your risk tolerance depends on your goals for the money you're investing. Someone planning for a major purchase like buying a house in the near term will likely want to keep more of their money in low-volatility assets that are considered more safe like bonds, and hold more cash, than someone who has more time before they plan to spend their money, says George Gagliardi, financial advisor at Coromandel Wealth Management in Lexington, Massachusetts.
It’s particularly important that investors who are close to retirement don’t overexpose themselves to risk, he adds.
A diversified portfolio that's in line with that risk tolerance can help. Diversification refers to having a variety of investments that each comprise just a portion of your portfolio. Having a mix of assets means that, ideally, when one asset or sector is struggling, another in your portfolio is holding steady (or even doing well).
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