Resisting the Urge to Panic Sell

The markets have been on a wild ride recently, with many major indexes now down over 10+ percent so far this year.  The selling has gotten downright ugly, some even say ridiculous and yet it was bound to happen as the market has been on a steady upward climb for the better part of the last ten years.  All it took was the "black swan" of a viral pandemic to trigger the sell signal. 


Here's how the Dow Jones Industrial Average has fared over the past 10 years:

Dow Jones Industrial Average - 10 Year Performance
Here's how the S&P 500 has fared over the past 10 years:

S&P 500 - 10 Year Performance
What's an investor to do in a market environment such as this?  Buy the dip?  Sell everything?  Do nothing?  The answer, as always, is "it depends."  Probably the best thing you can do is have your portfolio balanced in a way that matches up to your risk tolerance.  That way, when extreme market volatility hits, you can do nothing and relax a bit more knowing you are in alignment with your appetite for risk and you can handle these temporary "paper" losses.  
People who are less risk tolerant will be more conservative in their investments and will take less of a hit when the market drops, but also miss out on some upside when the market goes up.  Alternatively, the more risk-tolerant will be okay with temporary declines in value, even if significant, since they are willing to be patient for the greater upside potential when the market does turn around.  Whether you are risk averse or risk tolerant, it's a good idea to have a variety of investments in your portfolio and not have 100% of your wealth tied up in the stock market (unless you're Warren Buffett).  For the risk averse, holding a portion of your portfolio in government bonds, cash / short term investments and similar types of investments is critical for that "peace of mind."
When you look at market history, most years are positive and years where there is a loss are somewhat rare.  This favors the long-term or "buy and hold" investor, provided you have a long time horizon.  
Take a look at the 30 year performance of the S&P 500:

S&P 500 - 30 Year PerformanceSure there were some down years, especially 2008 (Great Recession) which took a 38% hit, but when you look at it, there were 7 down years and 22 up years (2020 is still early and could be green or red, who knows).  In other words, 76% of the time, over the long term, you are going to be making money in the stock market and you are only losing money 24% of the time.  As such, if you simply held on during the "red" years, you would be sitting on a nice gain over that period of time.  That's why it's important to resist the urge to panic sell.  
It's a lot easier to do this when you have minimal debt, adequate cash on hand for emergencies and for investing opportunities, strong cash flow from your investments and a variety of different investments such that some will perform well in any market environment.  That type of strategic approach brings peace of mind to the investor, regardless of your appetite for risk.  That's why it's important to have a strategy and to stick with it, rather than reacting to market ups and downs.  For example, maybe you invest a portion of your monthly salary or annual bonus in a portfolio of dividend stocks.  Maybe you also contribute to a 401(k) every month and an IRA once a year.  Keep doing that consistently year in and year out, don't try to time the market and market ups and downs will not matter.  
Perhaps one of the "gifts" of the recent market dislocation, in addition to lower prices for good stocks and improved dividend yields for some of my favorite stocks, the rally in 10-year treasuries and corresponding yield decline has made it a great time to refinance real properties!  When life gives you lemons, make lemonade!
I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.
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