The mistakes investors should avoid when the stock market plunges

James F. Peltz, Los Angeles Times on

Published in Business News

The recent plunge in stock prices easily could prompt an average investor to bail out of the stock market. But that's often a mistake.

There's no denying how nerve-wracking a 1,000-plus points drop in the Dow Jones industrial average can be, especially when it happens twice in four days as it did last week.

The market also briefly suffered a correction -- that is, a drop of 10 percent or more from its most recent high -- and headlines about the nosedive made it seem the world was ending.

So, the temptation is to yank money from the market out of fear there could be more losses, with the idea that one will wait until the downturn eases and then reenter the market.

Indeed, last week a sizable 8 percent of the assets, or a record $23.6 billion, was pulled out of the world's biggest exchange-traded fund, the SPDR S&P 500 (or SPY), which tracks the benchmark Standard & Poor's 500 stock index, Bloomberg reported.

Such funds are known as "passive" investments because they simply follow the movement of an index, as opposed to "actively" managed funds that pick individual stocks. But the sudden shift out of the SPDR S&P 500 showed many investors were hardly being passive themselves.

--Sponsored Video--

The temptation to sell is heightened by the fact that many investors would be cashing out profits because, until this month, the market repeatedly had climbed to record highs to extend its nine-year bull rally.

But that practice is called trying to time the market. And, for average investors, too often that doesn't work because it's difficult to predict the optimum time to get back in.

The result: Those investors often are late coming back to the party, arriving after stock prices turn back up.

"Market timing is really, really difficult," said Rob Austin, head of research at Alight Solutions, which tracks trading in 401(k) retirement accounts. "Some of us can do it, but most of us can't."


swipe to next page


blog comments powered by Disqus