Stock Market News on Wall Street
How investors react to the latest stock market news on Wall Street is critical to the long term success of their investment plan. While a significant decline in the market and increased volatility is always a possibility when you invest in the capital markets, investors who avoid making short term investment decisions based on fear and emotion are those who will most likely benefit the most from the strong gains in the months and years ahead.
One of the most difficult times for many investors is enduring a lengthy decline in the stock market. No one can ever predict the next event or series of events that might trigger a long term decline in the market or a stock market crash.
Unfortunately, many people make investment decisions based on the most recent turn of events in the news. Do you make decisions about how to invest based on the latest stock market news on Wall Street or in the context of a long term plan? When you invest for the future, there will always be some terrible times for the stock market. If you know this going in, then you might know that you should not panic during a market decline. There will always be ups and down in the market caused by national and worldwide events that vary in terms of scope and severity. Think back to the last financial crisis during which the value of your investments went down. How bad was it? Did you sell your investments when the market went down and miss out on the subsequent upturn?
Historically, stock prices are typically at their lowest point when investor sentiment is the worst. Likewise, stock prices are typically at their highest point when investor sentiment is the best. When investment decisions are made in the context of a long term plan, you can avoid the urge to sell out of investment securities when prices are falling and the urge to buy into investment securities when prices are rising.
What you do during a lengthy market decline depends on whether you have taxable investments, investments within employer sponsored retirement plans or both. Assuming the asset allocation of a portfolio or portfolios is based on the appropriate risk assessment and if there has been no change in the ability to tolerate downside risk, here is what investors should do during a time of increased volatility and during a downturn in the market:
Taxable Investments
When conditions are their worst and investor sentiment is negative, it is generally wise to wait until economic conditions improve before making major changes in the balance of a portfolio. Assuming the asset allocation was based on the appropriate risk assessment to begin with, investors who wait until conditions improve will;
1) Avoid the expenses of selling out of an asset class at a market bottom.
2) Avoid missing out on the benefits of owning a particular asset class during a subsequent upturn in the market.
Holdings in Retirement Plans
For investments held within tax deferred employer sponsored retirement plans, it is possible to make changes in the balance of the portfolio during a time of increased volatility and during a downturn in the market. In this case, the portfolio can be rebalanced back to the target asset allocation on a periodic basis.
Change is a fact of life. However, sometimes change happens too fast and without notice. Oftentimes, the direction of change is alarming, especially if the change is in response to negative news. An overreaction to negative stock market news can impact the long term success of your investment plan.
As stated previously, no one can ever predict the next event
or series of events that might trigger a bear market or long term
decline in the market. It is useful to keep in mind that despite the
potential decline in stock prices as a result of negative stock market
news, investors who avoid making short term investment decisions based
on fear and emotion are those who will most likely benefit the most
from the strong gains in the months and years ahead.
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