Why Panicking About the Stock Market Is Not Worth It
If you’ve been following the ongoing market volatility and watching with worry as the value of stocks plummet, you are not alone. Given recent events, it’s not unreasonable to feel anxious about the future of your investments. You may be asking yourself questions like, “Should I be worried about the stock market crashing?” Or, “Should I sell my stocks now?”
Well, our hope is that this article will give you peace of mind when it comes to those big questions you’ve thought through pertaining to investing.
It May Be Difficult, But You Have to Separate Your Emotions from Investing
On January 27th, many people were shocked to see multi-day sell-offs that rivaled those of the pandemic-related drops in March and October 2020. But by the end of the day, the Dow Jones Industrial Average, the S&P 500, and the NASDAQ were closing in the green . If you sold your position early in the day, chances are you were kicking yourself by 4 PM, showing how futile it can be to make market decisions based on emotion.
We recognize it’s hard to separate emotions from investing, especially when it’s your hard-earned money on the line. Nevertheless, here are three reasons why we think panicking about the stock market is not worth it.
3 Reasons Why You Shouldn’t Stress About the Stock Market
1.) Short-Term Fluctuations Are Normal
No matter how many times you hear that the ups and downs are just an inherent part of the market, it can still be scary to see a major market drop. We think it’s helpful to understand why these short-term fluctuations are normal and what you can do instead of panicking.
Every time you buy a stock, you are essentially betting against the person who sold it to you. The seller is assuming that the stock is not worth holding onto and by buying it, you are assuming that the seller is wrong. This creates an environment in which rumors, emotions, and current events can significantly affect the price of stock. The market is constantly adjusting to new information, and Monday’s volatility was no exception. With concerns about inflation, rising interest rates, and geopolitical events between Russia and Ukraine, it would be surprising if the market didn’t react.
2.) Selling During a Drop Will Lock in Your Losses
Part of what drives the volatility of the market is the panic buying and selling that accompanies market fluctuations. It’s a natural reaction to see huge drops and think you are better off returning to a cash position. After all, cash is very often associated with a sense of safety and security. But selling at the bottom of a market drop will lock in your losses.
Over the long term, the S&P 500 has risen an average of 10% over the last 95 years!  And while past performance cannot be used to predict future results for a specific stock or portfolio, historical data from the market as a whole is often used to point out why reacting to a sudden market downturn is not the best decision for your overall portfolio. In fact, a study conducted by the Schwab Center for Financial Research has shown that the S&P 500 has risen an average of more than 24% within 12 months of every market correction bottom since 1974 .
So, if you sold at the bottom of those corrections, you would have missed out on the ability to earn money on the upswing. Selling at the bottom is often seen as selling yourself short.
3.) A Long-Term Outlook Is Key to Reducing Panic
Despite the facts and figures, emotion can still play a significant role in how clients react to market downturns. Just as market fluctuations are normal over the long term, so are the strong reactions you might experience. We believe the key to reducing anxiety and remaining level-headed is to keep a long-term outlook and make sure your portfolio is properly diversified. This means that the different investments within your portfolio move in different directions in reaction to market variables. So, when one stock drops significantly, the others may gain or stay the same, ensuring that your overall portfolio is kept afloat. A long-term asset allocation strategy that is properly aligned with your risk tolerance and your overall financial goals is a much stronger remedy for market volatility than panicking. Like the age-old saying: “Keep calm and carry on,” at Aviance we like to say: “It’s not timing the market, it’s time in the market.”
Approach the Stock Market with Confidence
At Aviance Capital Partners, we strive to provide our clients with the information and resources necessary to weather every market downturn with confidence. If you have questions about the recent market volatility or would like to review your portfolio, please reach out to us at (239) 598-4747 or email email@example.com.