Failing to have a plan
Investing without a plan is an error that invites other errors, such as chasing performance, market-timing, or reacting to market “noise.” Such temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.
Fixating on “losses”
Let’s say you have a plan, and your portfolio is balanced across asset classes and diversified within them, but your portfolio’s value drops significantly in a market swoon. Don’t despair. Stock downturns are normal, and most investors will endure many of them.
Between 1980 and 2019, for example, there were 8 bear markets in stocks (declines of 20% or more, lasting at least 2 months) and 13 corrections (declines of at least 10%).* Unless you sell, the number of shares you own won’t fall during a downturn. In fact, the number will grow if you reinvest your funds’ income and capital gains distributions. And any market recovery should revive your portfolio too.
Still stressed? You may need to reconsider the amount of risk in your portfolio. As shown in the chart below, stock-heavy portfolios have historically delivered higher returns, but capturing them has required greater tolerance for wide price swings.
The mix of assets defines the spectrum of returns
Expected long-term returns rise with higher stock allocations, but so does risk.