Consolidation can cut your monthly payments by almost 50%!
What to Do While the Market Tanks
By John Rosevear
Why do market corrections upset us so much? We all know—at some level—that the market is bound to hit bumps on its march upward, and some of those bumps will be big ones. But even so, those selloffs tend to be white-knuckle heartburn-inducing rides. I think there are two big reasons why that's the case.
Corrections tend to be fast and big. The market might spend a year going up 20% only to give up three quarters of that gain in a few trading days. The downward spikes happen so quickly that it's hard to avoid the fear that they'll keep going all the way to the bottom, even if we "know" that that's incredibly unlikely.
We hate losses more than we like gains. This principle, which the pros call "loss aversion," is a cornerstone of behavioral finance and was demonstrated by Nobel laureate Daniel Kahneman and Amos Tversky in a famous (among finance geeks, anyway) 1979 paper. Research has shown that losses may have as much as twice the psychological power of equivalent gains—in other words, the upset we'd get after losing half our portfolio is twice as big as the joy we'd get if our portfolio doubled. I don't quite understand how they measure it, but that sounds about right to me.
Put these two together, and what you get is this: When the market goes down hard, investors panic and sell, hoping to avoid further losses. Even if you know better, it's still tempting to sell—I've done it, many pros have done it, and if you've been investing for any length of time, you've probably felt the urge to sell on dips like last week's—even if you haven't actually sold.
Of course, selling on market dips is usually a bad idea, even if it is human nature. Not only do you lock in a loss, but you also pass up good buying opportunities. I probably have a dozen books on my shelves that quote Warren Buffett's famous dictum: "Be fearful when others are greedy, and be greedy only when others are fearful."
One reason Buffett's a multibillionaire while most of us aren't is that he has been able to hold on to his hat, swallow his emotions, and approach market dips rationally. He's one of many savvy value investors who buy up those good stocks that we've rushed to sell—and then make a bundle during the recoveries that follow.
How might we join them?
Grab an umbrella
It's best to think of a correction as a passing storm. You don't abandon your beach holiday and go home when a thunderstorm hits, do you?
Here are some things to keep in mind when squalls hit the market.
Don't panic. The market has always recovered. Odds are high that it'll recover this time, too. Remember that your investment horizon is years away, and corrections are often over and gone in a few weeks—and remember that you're wired to panic when you see losses, even "paper" losses. Unless your reason for owning a stock has fundamentally changed, there's no good reason to sell—even if the dip drags on for several months.
Remember that corrections often bounce. Sometimes, recoveries happen more quickly than the correction did—and even during the correction, prices will bounce up and down. Selling might increase your distress when you see prices recover a few days or weeks later. Some folks sold Apple Computer (Nasdaq: AAPL) at $135 last Wednesday—it closed near $144 just two days later. Oops.
Look for buying opportunities. It goes against our natures to plow more money into the market when things are looking bad, but... well, see that Warren Buffett quote above. For a buyer, a correction means that stocks are on a storewide sale. So take a look at your favorite stocks and see whether you can grab some bargains. Sure, they might go lower—but even if you don't get the lowest price, you can still set yourself up for good long-term gains.
If all else fails, just go to the beach. Or the lake, or the mountains, or the ice cream shop, or the library, or wherever you go when you're taking some time for yourself. Seriously: If you're fully invested in good stocks, there's really no need to do anything. Turn off your computer, skip your nightly date with CNBC, and use the business section of the Sunday paper to line the bird cage this week. If you built your portfolio using sound investment principles, those principles are still sound, even if Mr. Market is having a tough month. Have the confidence to walk away from it, and let Mr. Market work out his indigestion on his own.
Want more great advice on improving your personal finances? Check out the Fool'sGreen Lightnewsletter service. Each month's issue offers excellent tips that together can save you hundreds of dollars—guaranteed. Get full access free for 30 days—there's no obligation to buy.
Fool contributor John Rosevear invites you to send him your comments, questions, and ideas. He owns shares of Apple. The Motley Fool has a disclosure policy.
This feature may not be reproduced or distributed electronically, in print or otherwise without the written permission of uclick and Universal Press Syndicate.
Article Title : What to Do While the Market Tanks
Comment not found for this article.
+ Consolidate Your Private or Federal Student Loans Now! (Save Thousands!!)
Up-to-date information is outdated information.
Get it up-to-the-minute from Law School Loans.
At Law School Loans, America's top law school lender, we employ some of the best financial advisers and finance journalists in the student lending industry. Be sure you're getting the most accurate data from the most trusted source, and stay up-to-the-minute on your own student loans!
Just use the RSS feed below and add this to any of the channels you use to receive blogs, podcasts, and other syndicated material.
Click here to sign up for our weekly Newswire now!
Free Ebook With All Registrations
I had started my application with Law School Loans back in June and I thought I had completed it but apparently I had left off my loans. Thankfully Law School Loans contacted me because I was able to get my loan information in to them to complete the consolidation and lock in the pre July 1st interest rate. Keep up the good work - Zane K. Salt Lake City, UT
Your Federal Benefits
If you are still in-school, you may reserve your consolidation for graduation with Law School Loans. By signing and returning your application now, you will be guaranteed the current low rates on your consolidation, and you will not have to think about your consolidation again until you enter repayment.
If you run into a period of financial difficulty, federal consolidation loans generally qualify for periods of deferment or forbearance until your financial situation improves.
A few minutes on the phone or online could save you $600 a month or more on your student loan payments.
or Call (800) 659-8344
-CLICK HERE-to request an appointment with one of our expert loan counselors.
Free Ebook With All Registrations
