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5 top mistakes to avoid during a market selloff

Brian Baker, Bankrate.com on

Published in Home and Consumer News

Stocks, cryptocurrencies and even bonds have tumbled in 2022 as investors react negatively to rising interest rates, soaring inflation and the Russia/Ukraine conflict.

The S&P 500 index has fallen about 16 percent so far this year, while the tech-heavy Nasdaq Composite is down around 26 percent. Popular cryptocurrencies Bitcoin and Ethereum have also retreated, each falling at least 50 percent from their all-time highs. Even bonds, often thought of as a safe haven during times of market stress, have joined in the rout, with U.S. government and corporate bond indexes down more than 10 percent in 2022.

It can be concerning to watch markets fall so quickly and see your portfolio and retirement accounts decline in value. But it’s especially important during market declines to keep your eyes on your long-term goals. Don’t fall into the trap of thinking you can time the market, jumping in when things are good and out when things are bad. Avoiding this and other misguided moves will serve you well in the long run.

Avoid making these investment mistakes when markets plunge

1. Don’t become a short-term trader

It can be tempting during declines to get wrapped up in the latest news and the tick-by-tick of where markets are trading. Cable news shows have rapidly moving prices flashing on the screen at all times and may hold nightly specials to discuss where things are headed next. But the truth is that these so-called experts are a lot better at explaining what has happened than what’s going to happen.

 

Remember why you invested in the first place and keep those goals in mind. Many people invest for long-term goals like retirement, which might still be decades away. Resist the urge to become a short-term trader just because prices are moving around a lot. If you didn’t predict the current selloff, don’t think you can predict what will happen next.

2. Don’t chase recent winners

When markets are falling, it’s natural to think about where you could be invested to avoid the current pain. But selling what has gone down to buy what has already gone up, isn’t likely to be a winning strategy over time. You may feel better in the short term and you may even make money for a period of time, but you’ll be better off sticking with your chosen portfolio allocations and rebalancing toward those allocations as prices change.

Remember that stocks are part of a long-term investment plan and their volatility is to be expected. Your reward for handling periods of high volatility is a return that has averaged around 10 percent per year for decades, based on the S&P 500.

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