After a market drop, some investors might move their money to wait it out. Find out why staying invested may be a better approach than stock market timing.
Focus on the long term. Tune out the noise. Don’t trade on emotions. Ever wonder why this is the mantra of many financial professionals after a significant drop in the stock market? It’s because they understand that staying invested, even as you’re watching your portfolio decline, can be a way to help you keep moving forward on your financial journey—not market timing. Here’s why.
The only thing certain about investing is that stock prices will go up or down on any given day. No one knows for sure which way they’ll go, by how much, or for how long, which makes timing the market extremely difficult. If you get spooked by the headlines and move your money into more conservative investments, you might miss a stock market recovery.
History has shown that after a downturn, stock prices tend to rebound relatively quickly. Of the 10 days when the Dow Jones Industrial Average (DJIA) dropped more than 5% (see table below), the market bounced back within six trading days in all but three instances, one being during the recession of 2008. This means individuals who stayed invested, instead of trying to time the market, were generally made whole within a matter of days. Of course, past performance doesn’t guarantee future results.
Recovery Period (Trading Days)
Understanding how quickly stocks tend to rebound might help you keep future declines in perspective. To further fight the urge to time the market, you might consider:
It’s only natural to have some concerns during a market downturn; after all, you’re trying to plan for your future. But it’s also important not to overreact and take actions that could throw you off-course, such as trying to time the market. Remember, you created your financial plan to help you pursue goals like retirement or your children’s education, and bumps in the road are to be expected. When you start to feel the bumps, remind yourself to focus on the long term, tune out the noise, and don’t trade on emotions.
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