How to Avoid Costly Mistakes When the Market Is Down

5 Minute Read

In the first three months of 2017, the S&P 500 was up about 5.5%. But don’t get too comfortable with the upswing. The market isn’t always predictable.

In fact, the Dow fell at the end of March in an eight-day losing streak—the longest since 2011. The ups and downs of the market are tough for anyone who’s building wealth for the future. You want your money to grow, not dwindle!

In the midst of a volatile market, it’s easy to get caught up in waves of emotion. Anger, fear, sadness, worry and especially panic can cause you to make serious and costly mistakes. To be an educated investor, it’s important to know how to deal with the emotional side of investing so you can avoid these mistakes—and avoid losing thousands of dollars.

John’s $20,000 Roller-Coaster Ride

Take John for example. Last year, he learned the hard way that it’s best to keep his hands off his investments!  


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In the first eight days of January, the S&P dropped by about 4.5%—and it dropped another 3% a week later. By mid-February, it was at its lowest point since April 2014, closing down 11.9% from the end of 2015. That drop wiped out all of John’s gains from the last half of the previous year and cut the value of his investments by nearly $20,000.

Naturally, John began to panic. What if the market continues to tank? I can’t afford another $20,000 hit next month! To keep from losing any more of his savings, he sold off his mutual funds and moved the cash into a money market account to ride out the storm.

The wait wasn’t long. By April 1, the S&P 500 had risen 12.5%. That would have restored nearly all of John’s losses. But he wasn’t convinced that the recovery was real, so he kept his money on the sidelines and missed out on a nearly $18,000 gain. 

It’s a mistake he won’t make again this year!  

Where John and Millions of Others Went Wrong

John’s mistake is one millions of investors make every year, Erik Sorenson, a SmartVestor Pro in Denver, Colorado, said. That’s why he teaches his clients how to deal with market volatility before they even start investing. Here’s the advice he’d give John to help him avoid the same mistakes in the future.

1. Don’t Bail on Your Investments

When John’s retirement balance began dropping, his knee-jerk reaction was to protect the money he still had by getting rid of his “risky” mutual fund investments and moving his money to something “safe” until the market stabilized.

But it’s impossible to predict the market’s future, Erik explains. When investors try to time the market this way, they generally end up losing more money than if they’d left their investments to ride out the roller coaster.

“If you miss some of the better up days in a volatile market, that's going to significantly hinder your investment performance,” Erik explained.

According to Fidelity Investments, if an investor starting with $10,000 had missed the best five investment days between January 1, 1980, and May 20, 2016, they would’ve missed out on roughly $180,000 in growth. That number more than doubled to $414,000 if they missed out on the best 30 days.

John forgot that retirement investing is a 20-, 30- or 40-year process. “Like Dave says, it's not an overnight success where you buy the best stock and are rich the next day. You really need to approach it as a long-term process,” Erik said.

Don’t focus on day-to-day or month-to-month losses. Hang on to your mutual funds through rough markets. When they rebound, you’ll be grateful you did.  

2. Keep Investing—Especially When the Market Is Down

No one likes losing money. But Erik always tells investors to keep investing money even if the market is dropping. And Dave's own investing advice is similar. But it seems counterintuitive, right?

Here’s why that’s good advice: When the market drops, your mutual fund shares are basically on sale. A down market is the time to buy—not sell. "If you saw a TV for sale a month ago for $300, and it's on sale for $270 right now, you should probably go buy that,” says Erik.

And that’s not all. Historically, the stock market has always recovered its losses. Sometimes in a day. Sometimes in a week. Sometimes in a month or over several months. But it always has. And when the market does go back up, so will the value of your mutual funds.

When (Not If) This Happens Again . . .

Maybe you noticed that Erik’s advice is to help John avoid these same mistakes in the future. John will almost certainly deal with volatile stock markets again. And while he can’t go back and change the way he handled last year’s round of uncertainty, he can do a better job sticking to his investing plan the next time it happens.

To help him keep his perspective—and his investments on track—John can begin working with an investing professional like Erik who will make sure John is prepared for the next market swing. John’s pro will also make sure John is doing all he can to build up his nest egg, and his pro will help him decide when he’ll be able to retire.

Need help finding a qualified professional near you? Contact a SmartVestor Pro who’ll help educate and empower you to make smart decisions about your investments.   

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