What to do and what to avoid following a stock market plunge


(WTNH) — The stock market plunge on Monday likely has many investors wondering what should be their next money move. Financial Consultant John Caserta shares his advice.

How does this impact investors?

· It can be unnerving for investors at any level because it causes uncertainty.

· There is typically an emotional response to volatility, which can lead to knee-jerk reactions and rash decisions like pulling out of the market.

· In their 2019 Retirement Guide, JP Morgan studied the impact of pulling out of the market and missing the best 10 days in the market. During a 20-year period from Jan 1, 1999 and Dec 31, 2018, if you missed the top 10 days in the market, your overall return was cut in half from 5.62% to 2.01%.

· Studies in behavioral finance have revealed the following biases that impact investors performance :

Loss aversion – the idea that the pain in investment losses is greater than the joy of investment gains.

Herd mentality – the tendency for investors to follow trends set by larger groups of investors Hindsight bias – the “I knew it would happen” attitude

What should investors do?

· Meet with your investment advisor and review your portfolios. Think about your goals and your timeframe for your investments – are they short, mid, or long-term goals?

· Reevaluate your risk tolerance. Different investments such as stocks and bonds have different levels and types of risk. They react differently to different market conditions. In the event markets take a downturn, ask yourself how much of a loss can you tolerate.

What should investors NOT do?

· Avoid “market timing”. Making short-term changes by trying predict market performance can have a negative impact on investment returns.

· Avoid chasing trends. It’s tempting to make decisions on “perceived” trends but it’s important to realize that past performance is not indicative of future results.

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