When it looked like Republican presidential candidate Donald Trump would win the necessary United States Electoral College votes on election night, global investors started freaking out and yanking their money from the marketplace.
What’s more, our own stock futures plunged here in the U.S.
Everyone around me started looking at their portfolio balances. And I started figuring out how much cash I had on-hand for bargain hunting.
This morning, though, investors seem to be calming down. And even though stocks are down overall, they aren’t down by much.
In fact, it now looks like the Dow Jones will be doing quite well, and gaining ground. Turns out I won’t have a buying opportunity today after all.
However, the overnight reaction to the American presidential election does underscore an important point we should all take to heart.
Don’t let fear and market events dictate your portfolio.
During times of wild stock market swings and panicked economic proclamations, the idea to SELL! SELL! SELL! are rarely the times to freak out and make a financial move.
Fear leads to poor financial decision-making
For most human beings, fear usually clouds our better judgment.
Last night, watching investor reaction to the election, you might have worried about your retirement accounts and wondered if you should sell. Or, perhaps you were afraid to see your portfolio performance in the morning.
Unfortunately, pulling the trigger at that moment of fear — at that moment when you are down — is a surefire way to lock in your losses.
While there are legitimate reasons to sell investments and rebalance your portfolio, the fact that you are in a moment of panic is not one of them.
Responding to a market event by selling due to fear, whether it’s the stock market crash of 2008 or the election of a controversial president, is rarely the way to keep your portfolio growing over time.
This morning is a good example. Last night, many people panicked. Today, things seem fine.
At the end of the day, market performance is largely about perception. Markets don’t like a shock, and Trump as our next U.S. president was a bit of a surprise.
But the markets are now adjusting. As a commentator on CNBC points out, this election isn’t a systemic shock. Even though the results are surprising.
Stay the course to build wealth over time
The good new is dollar cost averaging can help you weather these situations.
First of all, it allows you to buy more shares for less. As Warren Buffett and others have famously pointed out, you want to buy low and do it when people are fearful.
For those of us who are younger, and still have 20 to 30 years of wealth building ahead, staying the course can help you over time.
The real risk is to folks who are getting close to retirement. A major market event can erase on-paper gains. And, you might not have time to recover before you need to start withdrawing from accounts.
This is why Modern Portfolio Theory and asset allocation theories suggest gradually moving your money from stocks into bonds as you approach retirement.
The idea is that you can protect yourself, to some degree, from market events by moving your money into assets that rely more on income generation (like bonds) than on appreciation over time (like stocks).
Once again, as you consider market events, it’s important to look at the long-term trends. Take a look at the following charts from StockCharts.com.
The first chart is of the S&P 500, the second one is the Dow Jones Utility Average.
As you can see, over time, the trend lines for both smooths out. And, stocks as a whole move higher.
Yes, there are drops — sometimes huge drops. But over time you are likely to come out ahead.
If you are in it for the long haul and focus on a wide swath of the market for investments, rather than try to pick the “right” individual stocks, you have a greater chance of success. No matter who is elected the next president of the United States.
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