4 Mistakes New Investors Make Every Time the Market Drops
Many investors felt on top of the world by the end of 2021, when the S&P 500 returned more than 27% over the course of 12 months. The Vanguard Total Stock Market ETF (VTI), a popular Exchange Traded Fund for enthusiasts of the Financial Independence Retire Early movement, also returned 25% that year. Other major indexes didn’t disappoint, either.
This year, the stock market is currently down and many investors who enjoyed the last decade of solid returns are feeling anxious. Financial advisors seem to agree that what you do right now can have a major impact on how your portfolio looks five, 10, or even 20 years down the road. To make the most of the bear market we’re currently experiencing, avoid these 4 common mistakes with your retirement accounts:
Mistake #1: Not Buying Stocks on Sale. Staying the course and looking to buy stocks on sale is important when prices for assets are dropping. Investors should be taking advantage of this opportunity. Some investment firms are “rebalancing” (adjusting) portfolios for their clients this year. They’ve been reallocating portfolios based on getting stocks and bonds at lower prices – which have been overpriced for the last several years.
The rebalancing of stocks also applies to retirement investments. Now might not be the best time to stop your employer’s 401(k) plan contributions or a traditional or Roth IRA. With retirement accounts, many people stop making contributions when the market is down. However, that’s the best time to increase it if you’re not maxing out your yearly allotment.
You now have the benefit of choosing the investment and amount to contribute over a period of time or “dollar-cost investing.“ At a low in the market, your money buys more shares than before. When the market recovers, picking up those extra shares means you will have the opportunity to reap the benefits.
Mistake #2: Panic Selling. Many investors make this mistake when markets are down. If you’re saving for retirement but not quite there, you may lose money twice if you panic sell. First, by selling at lower prices, and then by failing to buy back at the optimal time. Some people who panic move the investments in their retirement account to 100% cash. This can be a mistake if the money isn’t reinvested when the market picks up—they can miss out on capital appreciation.
Mistake #3: Obsessing Over Account Balances. It’s only natural to want to continuously check your retirement account balances while they drop, but it’s important not to obsess over the exact figures if you can. You still own the same number of shares you did at the end of 2021. Perhaps even more if you’ve been investing all along. The value of the shares may be down, but they have the potential to rebound and keep on growing if you stick with your plan and stay the course.
Mistake #4: Forgetting the Big Picture. Finally, it’s important to remember what you’re investing for in the first place. If you’re investing for a retirement that’s a decade or even several decades away, then it’s likely the current dip — and future dips in the market — will be nothing more than a blip on the radar by the time you begin taking distributions.
Remember that while it may take time, historically, the market has always recovered. There have been 16 bear markets since 1929 and markets have returned to their level on average between three to four years later (and this includes the extreme outlier that was the Great Depression.) If you are at least that long from retirement, you can feel confident that continuing your contributions (or even increasing them) is a financially prudent decision.
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From BusinessInsider.com
