5 ways to stay calm in a down market
When stocks are falling, take these steps. They'll keep you from doing things you'll be sorry for later.
1. Paste this to your computer
Had you invested in an S&P 500 index fund in August 1997 and sat tight for 10 years, you'd have racked up an 88% return. Had you missed just the 20 best days in the market over that period, you would have had a 20% loss, according to Chicago's Altair Advisers. Moral: Stock returns come in bursts. Step out of the market, even temporarily, and you may miss the whole point of owning stocks.
2. Get your emotions out of the picture
Invest via an automatic plan that moves money into mutual funds every month. Then have your portfolio rebalanced automatically - lifestyle or target-date retirement funds can do the job. Some 401(k) plans offer a rebalancing service.
3. Focus on what you can control
That would be costs. Assuming an 8% annual return, if you invest in an actively managed fund with a 1.5% expense ratio vs. an index fund that charges 0.2% you'll give up almost 20% of your profits.
4. Give yourself a taste of power
Set aside 5% or so of your portfolio as mad money in which you're free to deviate from your long-term plan. That way you can indulge hunches and gut feelings without harming yourself too much.
5. Seek professional help
If you move money around every time the Dow drops 200 points, hire a financial planner. Yes, your expenses will go up. But if that keeps you in the market, it'll be well worth it.