Head spinning from these daily 5% gyrations of the Dow? Mine too.
Trying to remind yourself that, in the long run, today's investments will be profitable -- even though investors in S&P 500 stalwarts like Microsoft (Nasdaq: MSFT), Pfizer (NYSE: PFE), and Coca-Cola (NYSE: KO) have lost money on their investment over the past 10 years? Me too.
Still having trouble not getting swept up in the market's panic? Likewise.
It's markets like these that trick even the most long-term-oriented investors into thinking about selling their stocks. After all, when you've watched your portfolio's value drop in line with the world's indexes, it makes a certain amount of sense to seek out greater security at the expense of potentially greater returns.
But are you really getting more security?
I don't think so
Warren Buffett doesn't think so either. As he put it in his recent New York Times op-ed, "people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."
Rule Your Retirement
advisor Robert Brokamp recently summed it up this way: "Staying completely out of stocks trades a shorter-term risk (volatility) for a longer-term risk (not having enough money due to conservative investments)."
Selling your stocks isn't reasonable, in other words, but it's still very, very tempting. Why? Because we're hardwired to take on the emotions of the people around us.
Catching the panic
According to neuroeconomist Jason Zweig, "You can catch other people's emotions as easily as you can catch a cold." And when we're surrounded by hundreds of thousands of investors -- retail and professional -- panicking on 24/7 financial headlines, "today's financial markets … constitute one giant panic-transmission machine."
Not only that, when we get frightened, we automatically prepare to respond -- but our response is less creative, less thought-through, and less trusting than it would otherwise be.
But that still doesn't mean you should sell.
Here's what you should do
The market's gyrations -- combined with the blaring headlines -- may be making our trigger fingers itchy, but while we can't think our way out of our inborn tendencies, we can change things nonetheless.
In order to reduce our collective panic -- and thus knee-jerk selling -- Zweig recommends distancing yourself from its sources. Turn off the television, socialize with people who talk about something other than investing, and find ways to distract yourself when you start to panic about the market.
Once you've detoxed from the headlines, consider these suggestions from Robert Brokamp for a positive response to our volatile market.
1. Rebalance your portfolio.
"Whatever you determined to be your ideal portfolio way back when, you no longer own it," he says. This is a great time to reallocate any extra cash you have or to sell bonds to purchase stocks selling at a significant discount to their intrinsic value.
Don't have an asset allocation plan? Now's an excellent time to create a well-diversified portfolio with exposure to large caps, small caps, real estate, and even international stocks like America Movil (NYSE: AMX) and Canadian Natural Resources (NYSE: CNQ).
2. Contribute more to your retirement accounts.
If you're still saving for retirement, continuing to invest through the sell-off will reward you much more than investments you made during the last bull market cycle. Seek out top companies selling well below their five-year average price-to-earnings ratio -- like Yum Brands (NYSE: YUM) and eBay (Nasdaq: EBAY) -- or strong dividend-paying stocks.
3. Pay off your mortgage.
Reducing your overall debt load not only makes for a guaranteed return, but it also reduces the amount of money you'll need in retirement -- making sure your investments go further.
The Foolish bottom line
With all of the panic-inducing headlines screaming from every television station and website, it's hard to do nothing. But resist the urge to respond to panic by selling -- you'll only be undermining your own long-term returns.
Robert Brokamp has four additional suggestions for positive ways you can respond to this market. If you'd like to see what they are, just click here for a 30-day free trial of his Rule Your Retirement newsletter. You'll get all of his sample portfolios as well as suggestions for different asset classes to ensure your portfolio is in line for a successful retirement -- and there's no obligation to subscribe.
Fool analyst Adam J. Wiederman owns no positions in any of the stocks mentioned above. The Motley Fool owns shares of Pfizer, which is a Motley Fool Inside Value recommendation. Microsoft and Coca-Cola are also Inside Value recommendations. America Movil is a Global Gains pick. eBay is a Stock Advisor pick. The Fool's disclosure policy is here.
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