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Staying Rational on a Big Down Day in the Market

Posted on Thursday, February 27th, 2020 by Sean Sechler

Staying Rational on a Big Down Day in the Market

It can certainly be stressful to see a huge down day in the stock market. Considering the fact that the S&P 500 experienced the largest two-day drop since 2015 this week, many investors are starting to wonder if the sell-off has only just begun. One of the problems with a long-term bull market is that it can lull investors into a false sense of security and cause them to overreact at any downside, which we are seeing now in some ways.

Many of the most successful investors of all time have lived and been invested throughout periods of extreme volatility. This tells us that instead of reacting dramatically and selling everything during a big down day in the market, it’s best to keep a long-term view and keep your emotions in check. If you are feeling stressed out or worried about this week’s market sell-off, it is very important to stay rational and make decisions in a calm and collected manner. Let’s take a look at a few practical tips for staying rational on a big down day in the market.

Reevaluate Your Personal Levels of Risk Tolerance

Whenever you invest in something, it is absolutely vital to consider the potential downside risk. The truth about investing is that there is always the risk of losing your capital. If you find yourself constantly stressed out or emotionally distraught during extreme volatility in the market, it’s a good idea to reevaluate your own personal risk tolerance levels.

Think about your thought process and goals when you initially made your investments. Did you consider how much money you were willing to risk? Remember that stock market corrections are a natural part of investing. The sooner you can accept that volatility and corrections are an inevitability, the more rational you will be during periods like this week. If your risk tolerance levels have changed due to new financial obligations or other personal factors, then you might consider reducing your risk exposure in the market. What you shouldn’t do is panic sell or make irrational decisions based on emotions simply because the market sells off big one or two days.

Take a Look at Long-Term Stock Market Trends

Another great thing to do that will give you perspective during times of increased market volatility is to take a look at long-term trends. Pull up a chart of the market and take a look at how it performed after large market downturns of the past like the Great Recession in 2018. It’s very easy to get caught up in a shorter timeframe view during large market downturns. This can lead to poor decisions.

If you really want to stay rational during times of increasing volatility, it really helps to take a look at the bigger picture. Even after the worst market downturns of the past, patient investors were always rewarded with long-term returns. Keep that in mind if you are thinking about selling everything or making massive investment decisions based on one bad week in the market.

Stop Checking Your Brokerage Account So Often

This tip might seem a little counterintuitive, but the reality is that opening up your brokerage account on days when the market is down big can be upsetting and lead to rash decisions. Often times, investors are their own worst enemies during times of increased volatility. It can feel like the whole world is crashing down when you open up your account and see nothing but red.

If you really want to stay logical and committed to your long-term investing goals, you should stop looking at your brokerage account so frequently. Some of the most successful investors only check their account balances once per month to avoid letting emotional losses or gains affect their decision-making process.

Consider Hedging or Taking Some Profits

The last tip we are going to suggest for staying rational during a big down day in the market is to consider hedging your portfolio or taking some profits. This is a good option if you find yourself stressing about your investments. The last thing you want is to have your mental or emotional well-being negatively affected by your brokerage accounts.

If you want to buy peace of mind during periods of increased market volatility, you can look into hedging your portfolio by purchasing safe-haven assets like Gold or U.S. Government Securities. Additionally, you can purchase derivatives or even consider taking some profits on some of your winners. Taking profits offers multiple benefits, as you are reducing your risk exposure to more downside and gaining cash that you can deploy when you feel like it is the appropriate time to invest again.

Market volatility can be downright scary, but it’s important to understand that corrections and even large down days in the market are simply a part of any investing journey.

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