Why do market corrections upset us so much? Here are two reasons: We hate losses more than we like gains, and corrections tend to be fast and big. The market might spend a year going up 20 percent, only to give up three quarters of that gain in a few trading days. The downward spikes happen so quickly that we fear they’ll keep going all the way to the bottom, even if we know that that’s very unlikely.
Selling on market dips is usually a bad idea, even if it is human nature. Not only do you lock in a loss, but you also pass up good buying opportunities.
Here’s what to do when the market slumps:
• Don’t panic. The market has always recovered. Odds are high that it’ll recover this time, too. Remember that your investment horizon is years away, and corrections are often over and gone in a few weeks. Unless your reason for owning a stock has fundamentally changed, there’s no good reason to sell -- even if the dip drags on for several months.
• Remember that sometimes a recovery happens more quickly than the correction did -- and even during the correction, prices will bounce up and down.
• Look for buying opportunities. It goes against our nature to plow more money into the market when things are looking bad, but for a buyer, a correction means that stocks are on a storewide sale. So take a look at your favorite stocks (or mutual funds) and see whether you can grab some bargains. Sure, they might go lower -- but even if you don’t get the lowest price, you can still set yourself up for good long-term gains.
If all else fails, just go to the beach. Seriously: If you’re fully invested in good stocks, there’s really no need to do anything. If you built your portfolio using sound investment principles, those principles are still sound, even if Mr. Market is having a tough month.