4 Mistakes to Avoid When Markets Drop
Market volatility is an inevitable part of investing. Whether triggered by policy shifts, economic uncertainty or political events, downturns can catch investors off guard.
These drops can be especially jarring after extended positive stretches and may cause even seasoned investors to make costly mistakes. Here are four common pitfalls we see investors make when markets drop — and ways to potentially avoid them.
Mistake #1: Panic selling
When markets drop, many investors feel compelled to sell. But this approach locks in losses instead of following the proven “buy low, sell high” strategy. The best defense? Stay the course. History shows investors who remain disciplined during market downturns typically fare better than those who sell in panic. Staying invested allows you to participate in the inevitable market recovery and avoid the nearly impossible task of perfectly timing re-entry.
Mistake #2: Moving to cash and staying there
Market rebounds often happen quickly, with the strongest gains occurring early in recovery. Investors who wait on the sidelines risk missing these crucial upticks.
If you’re nervous about further drops, consider dollar-cost averaging back into the market. Invest a percentage of your cash each month; even if markets continue declining, you’re buying at lower prices. This gradual approach helps you work back up as markets recover.
Mistake #3: Becoming too attached to losing positions
Some investors cling to declining stocks, hoping for a turnaround. While optimism has its place, it’s important to evaluate each holding’s actual long-term prospects.
Consider tax-loss harvesting for positions in taxable accounts that are both declining and poorly positioned for future gains. Selling these investments lets you offset gains from better-positioned holdings while repositioning your portfolio for the current market environment.
Mistake #4: Failing to rebalance
Market shifts, both up and down, can throw your asset allocation off balance, introducing unnecessary risk and potentially limiting future growth.
Regular rebalancing enables you to deploy investment dollars to capitalize on current opportunities while improving your risk-adjusted returns over time. This disciplined approach increases your likelihood of achieving long-term financial goals.
The bottom line? If you don’t need immediate access to your invested funds, give the market time to recover. History shows us repeatedly that markets bounce back and grow over time. If volatility makes you uncomfortable, consider diversifying your holdings for a more balanced approach to long-term growth.
Investing involves risk, including the potential loss of principal, and there can be no guarantee that any investment strategy will be successful. Past performance does not guarantee future results.
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