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History Lessons for Managing Market Mishaps Part 2: Things Not To Do

In my last post, I revisited five “history lessons” covering what investors can do in troubled times. Today, I’ll share five more thoughts on what not to do during down markets and economic crises. Both posts are based on what we’ve learned from experience.  The circumstances precipitating each crisis may vary, but the abiding lessons remain relevant every time.  

So, without further ado, here’s what not to do as an investor.

#1:  Don’t try to market-time. 

Why not try to get out of a down market before it’s hit bottom?  For one, you can only identify a recovery in hindsight, after it’s too late to participate in the recovery.  (For all we know, we’ve already hit bottom this time after the March 23, 2020 panic sell-off.)  Here’s a post that covers this and three other reasons to avoid market-timing. 

Is It Time to Time the Market ... This Time?

 

#2:  Don’t try to pick individual stocks. 

In declining markets, a well-diversified portfolio is likely to decline a bit too, tempting some to concentrate on individual securities that seem more promising.  Again, the real winners and losers are only obvious after the fact. This piece demonstrates how abandoning a globally diversified stance is like removing your safety helmet mid-game.

Should Investors Buy Individual Stocks?

 

#3:  Don’t ditch your investment allocation. 

Once you’ve allocated your investments to an appropriate mix of stocks/bonds, there are times it may make sense to revisit that mix. Abandoning your carefully crafted asset allocation out of fear or panic is not one of those times.  

Three Times You Might Want To Change Your Asset Allocation

 

#4:  Don’t chase past performance. 

If you’ve heard it once, you’ve heard it a million times: Past performance (good or bad) does not predict future success (or failure). This is because “the market has no memory,” as Dimensional Fund Advisors’ David Booth explains in this reflection from January 2020.  

The Market Has No Memory


#5:  Don’t believe everything you hear; first, analyze it. 

Especially in times of increased uncertainty, investors are often exposed to an overload of inappropriate “advice.”  This piece covers how to assess a strategy’s basic odds for success or failure; it may help you keep your financial cool when others are losing theirs. 

How Understanding Statistics Can Make You A Better Investor