Amid market decline, don’t sell yourself short

The market has had a bumpy go so far this year, but don't let that dissuade you from investing. Holding on for the long haul can yield larger benefits than selling now.

  • close
    A Wall Street street sign marks the intersection outside the New York Stock Exchange.
    Mark Lennihan/AP/File
    View Caption
  • About video ads
    View Caption

The global stock market has been off to a rough start this year, suffering a terrible downward spiral. Many investors fear the trend will continue and stocks will lose even more value, jeopardizing their hard-earned savings. Meanwhile, pundits on TV speak of a potential recession or, worse, a depression. Despite all the negativity, most investors should hold on during this downturn.

In every major decline we see nervous investors make the same mistakes. In early 2009, many people had enough of the stock market and decided to get out. They sold at a low point only to miss out on an enormous recovery over the next four years. Don’t let yourself make this mistake this time around.

Selling low and buying high

First, consider the research. Each year Dalbar, a Boston-based consulting firm, examines how average investors perform relative to what they invest in. And without fail, each year the firm’s report shows that average investors underperform their benchmark significantly due to bad behavior. The most recent report shows that the S&P 500 earned a 9.85% annualized return, while the average stock investor earned just 5.19% through 20 years ended Dec. 31, 2014. In times of market declines, the results get even worse.

The reason for the severe underperformance is simple: Investors who sell out during a downturn are selling low. They claim they will get back in “when things look better,” which is, in effect, saying they would like to get back in when prices are higher. This cycle creates the massive underperformance that Dalbar tracks every year.

Survival instincts

Of course, it’s easy to understand the nagging feeling that we should do something when the markets decline. Our instinct when faced with a negative situation is to fix it. When it comes to investing, however, the only thing that will “fix” it is time, and unfortunately nervous investors don’t have a lot of patience.

During market declines we hear our friends, neighbors and the media constantly tell us how bad things are, which ultimately weighs heavily on our emotions. The best investors, such as Warren Buffett, can completely tune out that noise and stay disciplined during stock market declines.

Fighting the urge to make a change in your portfolio when the markets decline is one of the hardest parts of investing. It’s also one of the most important steps to achieving your long-term investing goals.

Diversification helps

But amid volatility, it can be difficult to feel confident in your investing strategy. Fortunately, a well-diversified portfolio can provide some padding that offsets the decline.

This year, the unexpected hero has undoubtedly been the bond market. After a year of so-called experts suggesting that diversification has failed investors, the bond market has rallied strongly to prove them wrong. The U.S. Aggregate Bond Index is up 1.5% for 2016 (as of Feb. 16).

This is certainly not enough to make up for the stock market decline, but it’s definitely enough to provide a cushion to diversified investors. This cushion helps smooth out returns and makes it significantly easier to stay invested until the stock market recovers.

Stay invested

While experiencing a decline in your portfolio is difficult, the alternatives to staying invested look bleak. Research tells us that those who try to move in and out of the markets to avoid declines end up hurting themselves eventually.

This time, make sure you don’t sell yourself short by making preventable mistakes. Stay invested for the long run, and don’t let the downturn get the best of you.

This article first appeared at NerdWallet. Learn more about Steven Elwell on NerdWallet's 'Ask an Advisor.'

The Christian Science Monitor has assembled a diverse group of the best personal finance bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link in the blog description box above.

Make a Difference
Inspired? Here are some ways to make a difference on this issue.
FREE Newsletters
Get the Monitor stories you care about delivered to your inbox.

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.




Save for later


Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items


Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items


Failed to save

You have already saved this item.

View Saved Items