Peter Lazaroff, CFA, CFP® Chief Investment Officer
Yesterday, the Dow Jones Industrial Average and S&P 500 entered “correction territory,” meaning they’ve reached a 10% decline from the market’s high point. If you’re like most people, this news has you a little uneasy.
That fear you feel is human nature. When the market goes down, our “fight or flight” instinct kicks in and makes us feel the need to do something. When our ancient ancestors heard a rustle in the bushes, they ran away in fear. There was no time to wait around to see if it was a lion—or just the wind playing tricks on them.
Thankfully, most of us no longer need to worry about being hunted down by lions, but that instinct to react when we feel afraid or threatened still remains. It’s tough not to react when we get spooked by the stock market.
But while human nature tells us to run in situations like these, it’s important to fight that basic instinct. In fact, your investment performance could depend on it.
The market’s best days sometimes follow its worst.
The best days in the market usually follow the worst days in the market. If you pull out now, you’ll not only realize losses, you could also miss potential future gains which would have helped you recover portfolio value.
The chart below from Dimensional Fund Advisors shows the impact of missing the best trading days over the past 27 years.
Shift the focus to your goals.
If you are nervous about the market, you are better off reviewing the underlying assumptions for your goals than making changes to your portfolio.
At BrightPlan, our goal planners take periods of bad performance into account by running 1,000 market simulations using a Monte Carlo analysis. As a result, it's unlikely this latest downturn has meaningfully changed your probability of success for long-term goals. Sign in to see for yourself.
Disciplined investing isn’t easy; it takes a healthy dose of self control. Fortunately, you don’t have to go it alone. When fear strikes in situations like these, BrightPlan helps you focus on your goals, stay the course—and fight that instinct telling you to “run.”