You’ve heard it before: Just because everyone else is doing it doesn’t mean you should.
And that adage applies to the current stock sell-off, according to financial advisors. Panicked selling will likely be a big mistake.
That is because that decision will likely be based on emotions, according to Douglas Boneparth, president and founder of Bone Fide Wealth.
“Even if you’re proven to be right, you’re still going to have an extremely hard time getting back in,” Boneparth, a certified financial planner, said. “No one ever does that at the right time.”
There are some things to keep in mind in this new market environment.
With the stock market up for so long, many have forgotten that volatility is normal.
“A correction is not unexpected,” Boneparth said. “People need to remember that markets go up and down.”
What’s more, bear markets are not necessarily unusual. In fact, historically they tend to happen once every three years, according to Scott Hanson, CFP, founder and senior partner at Hanson McClain Advisors.
“We haven’t had one in about 10 years,” Hanson said. “It’s certainly to be expected the market will be in a bear market.”
The sight of stock prices dropping might be unwelcome. Yet, looked at it another way, this can be a great time to buy.
If you are regularly investing in your 401(k) or retirement savings plan, you are already dollar-cost averaging, Boneparth said.
Dollar-cost averaging is a technique whereby you invest your money at a fixed rate over time. When markets are low, the money you regularly invest buys more shares. That puts you in a position to do well when the markets recover.
It’s a good time to revisit your investment portfolio and make sure it is aligned with your goals, said financial advisor Roger Ma, CFP and founder at Lifelaidout.
Focus on your particular risk tolerance and time horizon, rather than what is going on in the markets, Ma said.
“You shouldn’t stray from your financial plan just because you’ve seen a dip,” Ma said.
It is a good idea, however, to check every couple of months to make sure your actual assets are still within 5 percent of your target allocation, Ma said.
And if you do want to sell to realign your portfolio with your goals, do it the same way you should when buying stocks: gradually, over time.
Also be sure to check that you are not overexposed to certain areas of the market, said Diahann Lassus, a CFP and president of Lassus Wherley.
For example, U.S. large cap stocks have done really well. But having too much of your investments devoted to that area can make you extra-vulnerable when they go down. Even if you are invested in 20 different mutual funds, watch that you are not overexposed to one particular area, Lassus said.
While you do not want to sell everything and go to cash, it is a good idea to make sure you have the cash on hand that you will need over the next six to 12 months.
If you don’t, feel free to put cash aside to cover those needs and unexpected emergencies, Lassus said.
As interest rates rise, certificates of deposit, savings and rewards checking accounts are now providing more attractive returns.