1) Ask yourself if the value of your companies really changed by ten per cent or more in the course of a couple hours. Unless the company announced a buyout or a bankruptcy, the answer is almost certainly no. Short-term market moves are often based on wild fears, excessive speculation, and unfounded rumors. In times of great economic uncertainty, traders look to experts to tell them what to think, and effects are magnified when everyone jumps on the bandwagon.
2) Look at your company, not the market. Does it pay a great dividend? Is it likely to weather a recession well? Is it capturing more and more of the market? If you liked it yesterday and nothing has changed, hold firm. On the other hand, if you can't see anything to justify a price jump, sell while the selling is good.
3) Remember that the market is not a zero-sum game. Traders sometimes become caught up in the notion that if stocks are up by a certain percentage, they will necessarily fall by the same percentage when things get rocky. While that can happen, good stocks are generally worth more as time goes on, both because of inflation and because the companies grow. There will be pullbacks and sudden jumps, but the chart of a good company will trend upward over the long haul, and so will the chart of the market-long periods of stagnation notwithstanding.
4) Realize that the market is much easier to predict in the long term than the short one. People who tell you they know what the market will do tomorrow or next week are usually lying. But it's a pretty good bet that a very depressed market will return to normal in a few months and a super-inflated one will come back to earth. The same tends to go for individual stocks. The principle is known as reversion to the mean.
5) Be aware that sometimes there's nowhere to go but up, and vice versa. During the 2009 stock crash, people began asking an absurd question. Could the stock market go to zero? When you hear that question being asked, take all your money and grab stocks with both hands. Did they really think people would stop buying groceries or using gas? An individual stock may go to zero, but never the market as a whole. That is why some diversification is essential.
During the preceding tech bubble, people talked about how earnings didn't matter. They talked about a new paradigm, and how it was different this time. It wasn't. Here's a helpful hint: When Allen Greenspan or someone like him starts talking about irrational exuberance, it's time to think about selling.
6) If stock market volatility makes you sick to your stomach, ask yourself why you're still in the market. Some people can take market fluctuations in stride. For others, the thought of a loss is so frightening they lose sleep, develop ulcers, and become deeply depressed. And when they have a gain, they get so excited they jump the gun and miss most of it. If you find yourself on an emotional roller coaster that matches the market's gyrations, think about reducing your exposure or getting out altogether.
While the patient and the bold can make a great deal of money in the market, it isn't worth it if your peace of mind is destroyed and your quality of life trashed. The point of trying to make money, after all, is to make your life better.
7) If all else fails, walk away for a while. The world probably won't end while you're gone. Don't read the stock quotes, don't check the market-just take a break. Most studies show that people who only check their portfolios a couple of times a year do better than those who obsess.
Conclusion: Learning to handle stock market fluctuations with equanimity can improve your financial picture substantially. Extremes of all kinds tend to fade out in time, so avoid rash moves at all costs. If necessary, walk away from your portfolio for a while and return when things calm down.
2) Look at your company, not the market. Does it pay a great dividend? Is it likely to weather a recession well? Is it capturing more and more of the market? If you liked it yesterday and nothing has changed, hold firm. On the other hand, if you can't see anything to justify a price jump, sell while the selling is good.
3) Remember that the market is not a zero-sum game. Traders sometimes become caught up in the notion that if stocks are up by a certain percentage, they will necessarily fall by the same percentage when things get rocky. While that can happen, good stocks are generally worth more as time goes on, both because of inflation and because the companies grow. There will be pullbacks and sudden jumps, but the chart of a good company will trend upward over the long haul, and so will the chart of the market-long periods of stagnation notwithstanding.
4) Realize that the market is much easier to predict in the long term than the short one. People who tell you they know what the market will do tomorrow or next week are usually lying. But it's a pretty good bet that a very depressed market will return to normal in a few months and a super-inflated one will come back to earth. The same tends to go for individual stocks. The principle is known as reversion to the mean.
5) Be aware that sometimes there's nowhere to go but up, and vice versa. During the 2009 stock crash, people began asking an absurd question. Could the stock market go to zero? When you hear that question being asked, take all your money and grab stocks with both hands. Did they really think people would stop buying groceries or using gas? An individual stock may go to zero, but never the market as a whole. That is why some diversification is essential.
During the preceding tech bubble, people talked about how earnings didn't matter. They talked about a new paradigm, and how it was different this time. It wasn't. Here's a helpful hint: When Allen Greenspan or someone like him starts talking about irrational exuberance, it's time to think about selling.
6) If stock market volatility makes you sick to your stomach, ask yourself why you're still in the market. Some people can take market fluctuations in stride. For others, the thought of a loss is so frightening they lose sleep, develop ulcers, and become deeply depressed. And when they have a gain, they get so excited they jump the gun and miss most of it. If you find yourself on an emotional roller coaster that matches the market's gyrations, think about reducing your exposure or getting out altogether.
While the patient and the bold can make a great deal of money in the market, it isn't worth it if your peace of mind is destroyed and your quality of life trashed. The point of trying to make money, after all, is to make your life better.
7) If all else fails, walk away for a while. The world probably won't end while you're gone. Don't read the stock quotes, don't check the market-just take a break. Most studies show that people who only check their portfolios a couple of times a year do better than those who obsess.
Conclusion: Learning to handle stock market fluctuations with equanimity can improve your financial picture substantially. Extremes of all kinds tend to fade out in time, so avoid rash moves at all costs. If necessary, walk away from your portfolio for a while and return when things calm down.
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