By Michael Chamberlain, CFP, AIF
Learn more about Michael on NerdWallet’s Ask an Advisor
The recent stock market downturn shook a lot of investors who had gotten used to seemingly never-ending good times during the past few boom years. An across-the-board drop in all equity classes last quarter — small, large, U.S. and foreign — was a slap of cold reality.
Did you get a sense of dread every time you heard a market update? Did you log in to your online brokerage account every day and panic as the values dropped? Or worse yet, did you sell your shares in an effort to cut your losses before you lost it all?
These are understandable reactions to a market correction, but they’re also damaging to your financial future. It’s important to have a coping mechanism during periods of market fluctuation to maintain your mental health and help you to avoid a financial mistake.
One such coping option is to adopt the attitude of people who own rental property.
Take the long view
Investors primarily buy real estate for two reasons: cash flow and long-term appreciation.
Plenty of real-estate websites offer up-to-date estimates on property valuations, but rental property owners aren’t likely to visit these sites regularly to keep tabs — perhaps because such valuations generally aren’t reliable. Meanwhile, stock-market investors are attuned to every rise and dip.
What explains this difference between jittery stock-market investors and laid-back property owners?
The answer is that property owners are generally invested for the long haul, and in the meantime, there’s tangible cash flow in the form of rent money.
Even without that cash-flow cushion, investors can take the same attitude: Don’t worry about the short term when you’re invested for the long term. What constitutes “long term” can vary, but think of it as 20 to 40 years — enough to cover your working years and lead into retirement.
Worry about what really matters
None of this is to say you should ignore your stock portfolio entirely. It’s important to make sure you keep an optimum allocation of stocks and bonds in your portfolio over time, for instance. And during boom times, it can be smart to sell for tax reasons.
But don’t sweat a 5% or 10% stock-market drop, or even a steeper one. Assuming your portfolio is well diversified, trust in the market to rise again, as it has unfailingly for decades.
The only people who lose money in the stock market are the ones who panic and sell during downturns. Many of those people soon re-enter the market, having sold low and bought high.
So do yourself a favor: Resist logging into your investment account daily, weekly or even monthly. Keep your calm during those inevitable periodic market downturns. And above all, fight the temptation to sell significant holdings during a downturn, because you’re likely to regret it when the market inevitably surpasses its previous highs.
In other words, think like a real-estate investor. Over the long term your portfolio, just like your real estate, will appreciate.
Image via iStock.