My wife specializes in social psychology, leading her classes at some point each semester in a discussion about the impact of fear.
Fear, she teaches her students, is one of the great motivators. It prompts almost-immediate action -- and people rarely stop to think about what they are doing, especially if they are acting in groups.
Unfortunately, not only is fear a great motivator, it also clouds judgment. It is rarely a good idea to make a decision when your mind is clouded with fear, especially if that fear is bordering on panic.
Any decision you make based on fear, particularly if you following a panicked crowd, is usually a decision you will regret.
This is true especially when you invest. Volatility in the market can prompt some investors to sell quickly, without thinking the situation through. For example, there's been a lot of talk about a wealth-crushing phenomenon called the 'Triple Top' in the financial media, making even the best of us skittish. My colleague Amber Hestla has actually drawn up a presentation on how to protect your assets from this possible collapse in the coming weeks. You can view it here.
But as Amber will tell you, when you sell based on fear, rather than on analysis, you are likely to make mistakes, and you are almost certain to violate the number one rule of investing: Buy low and sell high.
So how do you break away from that panicked crowd? There are three simple tricks, and I'm going to tell you what they are. And they all take you back to the basics...
1. Stop -- And Don't Sell Anything Yet.
If you find yourself itching to unload your investments because you are afraid of what's happening next, stop. Anytime you feel an impulse to mess with your investment portfolio, it's a good time to step back.
Ask yourself why you want to sell. Be honest. If you plan to sell because 'everyone else is' or because you 'can't trust the market,' that's an indication you are panicking and not thinking things through.
Instead, take a few deep breaths, turn off whatever media is screaming at you to sell 'RIGHT NOW!'
and instead review the situation. Bottom line? You don't have to sell anything yet.
2. Look For Opportunities.
If you want to keep from panicking during times of market volatility, one of the best things you can do is focus on the opportunities rather than thinking only of the bad news.
Market volatility usually offers the chance for you to find bargains. Maybe you can pick up stock shares for cheap or make other deals. Your mindset can make a big difference. If you have a little extra capital sitting around, a market drop can actually be an opportunity. Start thinking of market dips as chances to get fundamentally strong investments on sale, and you'll avoid panic fairly easily.
3. Stick To Your Investing Plan.
One of the strategies for avoiding panic is to create a plan. When you have a good investment plan that focuses on asset allocation and investing in fundamentally strong assets, you are likely to weather the ups and downs of the market fairly well over time.
Put together an investing plan. Then, when market volatility threatens, remind yourself that you have a plan -- and that it's a solid plan. When you have a plan to fall back -- one that can help you stay the course -- you are less likely to panic and begin selling investments that you really should be keeping.
The Investing Answer: An investing plan that involves dollar-cost averaging and the purchase of index funds or index ETFs is usually the way to go. When you know that the stock market has never lost over long periods of time (20 to 30 years), it's a little easier to stay calm when you invest in index funds. Use dollar cost averaging, and invest a set amount of money each month.