Keep Calm in Bad Markets
At Betterment, we advocate for the “set and forget” approach: Make decisions when you are most rational and stick to the plan no matter which way the market moves.
Making rational investing decisions is similar to other decisions you make in life to improve your well-being – like deciding to lose those extra pounds of weight or getting out of a bad relationship – and like other good intentions, investing resolve can weaken when emotion takes over.
You’re probably familiar with guardrails that help you stay on track when dieting – like getting rid of any cakes or candy in your house so there’s nothing naughty to eat when you come home from work, starving. Or maybe you delete your ex’s number so there’s no chance of a drunk dial.
Selling stocks when the market is down is akin to finishing the whole packet of cookies – and a pint of Häagen-Dazs on the way home from the gym. Or calling your ex at 3am after one cocktail too many, and leaving a long-winded voicemail. In a word: cringe…
For most people it’s hardest to stick to the plan when the market’s heading south. It’s normal for the market to move down (and up), but it doesn’t feel normal when it’s your investment balance going down. We get that!
Apart from picking up this week, the market has been tanking since the start of May. We’re investing alongside you in the Betterment portfolio – we feel the losses too.
Many investors panic when the market tanks – but this is a very short-term way of looking at your investment’s activity. The worst thing you can do is sell your stocks when the market’s down. It’s a sure way to lose money.
While it may not feel like it today, you’ve already taken some important steps in buffering your investment against a downturn. These are the guardrails we’ve talked about.
When you created your Betterment goal, you created a strategy for long term investing by entering a goal and selecting your risk tolerance and time horizon. It’s important to remember the strategy when things get tough, it will help you stay focused on what you’re trying to achieve.
Sticking to the strategy means continuing to invest. Many Betterment customers automatically deposit funds each paycheck. When the market picks up, they will capture extra gains because they “bought low”.
One of the most important things you can do to help protect your portfolio from volatility and down markets is to diversify. While it’s no guarantee against losses, it can help limit them. Every penny in your Betterment account is diversified across thousands of companies so we’ve taken care of this for you.
The best thing you can do is focus on your long-term goals. Over 72% of Betterment investors have a goal more than 5 years away and the average time to a goal is 17 years. That’s a long time — and a lot of ups and downs.
It should not matter what your returns look like today. What matters, is that over time, you will achieve the growth you need to save for things that matter to you in life.
For those who are saving for short term goals, your allocation should be much more conservative. For example, Betterment recommends an allocation of 27% stocks for a goal that is 3 years away. The less risky bonds in the portfolio (73%) help buffer against loss in downturns like the one we’re experiencing at the moment.
Like using your trip to Mexico as motivation to avoid fries, think of your long-term goal as motivation for staying the course. You made your decisions for a reason — don’t let a crap time in the market derail your path. It will pick up again! And you’ve planned for that already.
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