One of the biggest mistakes long-term investors make is getting out of the stock market at the wrong time. We've all heard the saying "buy low, sell high," but mom-and-pop investors have a tendency to panic during market declines and sell when stock prices are down, locking in losses. But financial expert Mark Lamkin from Lamkin Wealth Services says it's predictable. Institutional investors crave market bull backs and bear markets, while many individual investors panic and sell!
Studies have shown that the majority of "ma and pa" investors not only underperform the markets but underperform their OWN investments.
To avoid becoming a casualty of the herd and selling at the wrong time, consider employing these Five strategies during a market correction:
1. Entertainment versus Advice
Do you love Jim Cramer's mad money? My opinion it's entertainment not advice. Listening to the wrong sources and reading about the dire economic predictions can heighten your nervousness. Don't look at your portfolio all the time. Turn off the TV and stop listening to your neighbor and the doom-and-gloom prognosticators. Focus on what you can control, which is your spending and saving. Don't sell because of this information!
2. Buy again?
Would you buy them again? This is the best time to increase your 401k contributions and START a DCA (dollar cost average) program. Do you want to buy cheap? If you wouldn't buy anything all over again, that no longer meet strong investment criteria are likely to decline the most in a market fall. You will be increasing your cash position, which can be used for the purchase of new stocks at attractive prices once the decline is over," Dayton says.
3. Make a list of Bargains
A declining market can offer the opportunity to add to your long-term investment portfolio at a lower price point. Long-term investors should welcome the occasional bear market if they have a good investment strategy and the discipline to see it through. The historical stock market trend is upward, and occasional bull markets are an opportunity to buy stocks while they are 'on sale.'
4. Get Diverse-Think small and mid
A portfolio allocation with 60 percent stocks and 40 percent bonds is an old benchmark and starting point for portfolio diversification. Check out stock-and-bond mixes in a target-date fund based on your age to get an idea of appropriate allocations for your time horizon. Four of the last five years, diversification has detracted from returns. Most people have migrated to Large Caps-now may be time to change that!
5. I Guarantee a Bear Market-Someday!
Lamkin says he's telling you "a Bear Market Will happen," what are you going to do?
Get a grip on your emotions. You may not be able to avoid an emotional response, but you can manage it. Following an investment process and being prepared for the inevitable market declines helps you act prudently, keep truly great companies in your portfolio for the long term, protect them during market slumps and be in a position to buy other great companies at attractive prices when others are selling them in panic.
Bottom line- People don't plan to fail, they fail to plan. Build a plan, take advantage of weak prices, add when you can and be greedy when others are fearful as Warren Buffet likes to say. - WDRB
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