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How to Stay Calm as the Stock Market Slumps

How to Stay Calm as the Stock Market Slumps

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The stock market is going through a rough time.

In the UK, we’ve seen unemployment fall to just 1.9 million (out of a population of 64.1m), its lowest level for more than six years and means our current unemployment rate is just 5.8%. Wage rises are starting to outpace inflation. The US is experiencing similar growth and in 2014 foreclosure filings hit the lowest level since 2006. It’s easy to think that we’re out of the recession and heading for the strongest growth since the 2008 credit crisis. I think we’ve yet to experience more lows, especially when we consider the stock market.

*S&P 500 volatility – January, 2015
*
I started investing in Vanguard index funds in November 2010. After two years of research, I took the plunge and invested in four funds initially followed by a fifth a year later. The majority of my money in my stocks and shares portfolio sits in the US index fund that aims to replicate the holdings in the S&P 500 index making it the one I like to track regularly. After growing steadily over the last three years with the usual drops, it’s recently hit hard times and I’m nervous. It was time to remind myself of key investing wisdom.

*Investing can provoke strong emotions
*
Any investor would be lying if they said that they hadn’t felt a pang of fear when a stock that they’d bought for $25 plummets to $15 or felt on top of the world when it jumps to $45 a share. Acting on either of those emotions is likely to leave you feeling investor’s remorse, not because you’d definitely lose money, you may end up making a tidy profit as a result, but because making impulsive decisions isn’t going to help you as a long-term investor. Act on those emotions enough and investing will become gambling.

*Discipline pays off in the long run
*
Knowing what your target asset allocation is and how long you want to stick with an investment is a cornerstone to successful investing. When your emotions get the better of you, you can turn your back on those emotions, review your strategy and decide whether or not you need to rebalance your portfolio.

*Control what you can
*
Instead of fretting over something I can’t control e.g. stock market volatility, it’s important that I focus my energies on how much I contribute to my stocks and shares every month. Checking in every few months to ensure my contributions is still aligned with my goals is a far better use of my time and energy.

How did I act? Well I didn’t touch anything. I reviewed my portfolio and checked that each fund was either 5% above or below my target asset allocation (my personal rule for rebalancing).I looked at whether I could contribute more monthly, but at the moment I am building a deposit for a property so decided against it. So. I changed nothing.

All information provided at Life-Life Balance is for informational purposes only. MM is not a qualified financial advisor. Before making any decisions on your finances you should seek advice from a qualified advisor.


If you liked this article, you may also want to check out the following articles in our Personal Finance section:

How to Set Up a Stocks and Shares ISA

Investment vs. Speculation

Choosing an Online Stockbroker in the UK