Ouch. Feb. 27 was one of those days when a pinched nerve would have felt like a relief compared with the pain felt by millions of investors. In just a few hours of trading, hundreds of billions of dollars vanished.
Stock market tantrums, like the one we recently experienced, are painful, but they feel even more excruciating because of the way we're hard-wired. We tend to dismiss our financial successes, while we let our setbacks gnaw at us. If you win $5,000 after spending an all-nighter in a smoke-filled casino, but you misplace your wallet that contained $200, you're going to fixate on the lost cash. The same thing happens on those days when the closing bell on the New York Stock Exchange sounds like it's playing a funeral dirge.
When the markets are doing their occasional rendition of "Nightmare on Elm Street," however, it's not the crazed man wielding the ax who should be feared. The worst enemy is more likely to be the folks, horrified at their losses, who are tempted to hit the panic button. During times like this, you want to make sure you don't sabotage your own portfolio. Here are ways to do just that:
- Don't overreact. So your investment accounts probably lost a pint of blood recently. Please keep things in perspective. Suppose, for instance, that your 401(k) and Individual Retirement Account slipped a few thousand dollars in value. Do you think that you're going to remember this February blip when you're ready to retire? Actually, you're probably as likely to remember it as you are to recall what you had for dinner on Feb. 27. Do you really think this setback is going to set back your retirement plans? Hardly.
During times like this, what people often forget is that market swoons can benefit diligent savers. Unless you're already retired, most people should be stashing away money regularly. Those investors will be rewarded when they deposit money into their accounts when mutual funds and stocks have shrunk a dress size or two. When that happens, your new money will stretch further. For instance, recently, I wrote a check for $1,500 for an index fund in my SEP-IRA. With that money, I bought 73 shares that were priced at $20.31 each. In the weeks leading up to April 17, which is when 2006 SEP-IRA contributions are due, I will invest more money in this mutual fund. After the recent Wall Street hit, the shares are priced at $19.53 apiece. So is this such a bad thing? Heck no. I'd rather dump money into mutual funds when they are cheaper. Of course, I want my mutual funds to do well, but my timeline is still many years away.