The stock market has been on a wild ride lately, and my investment portfolio has seen some big ups and downs.
On the down days, logging in and seeing that my balance has declined by tens of thousands of dollars isn't very much fun. But I never worry, even when things look dark, for four key reasons.
1. I'm diversified
Investing is always risky, but there are ways to reduce the potential for losses. Diversification is one of the best and most important strategies.
If you invest all your money in one company, or even one particular type of company, you take a much greater risk because if the business or industry underperforms, you'll do poorly. But if you spread your money around, there's a much better chance some of your investments will be winners.
I've chosen to diversify the easy way by buying multiple index funds that give me exposure to large, mid-size, and small companies. While I do have some individual stocks in my portfolio, the bulk of my investments are in these funds, and I've been able to build a mix of investments with them that I'm confident limits the risks I'm taking.
2. I'm confident in my investing strategy
When picking investments, I research the companies (or funds) carefully and I pay attention to how each one fits into my overall portfolio. I don't invest in anything I don't understand, and I never invest hoping for a short-term profit.
Since I know these are solid investing principles, I don't worry if my investments have some bad days because I'm confident I've bought stocks and funds that will perform well for me over time. That helps me to avoid reacting based on fear when I see my balance go down.
3. I understand the history of the market and that it pretty much always bounces back
While market crashes can be unpleasant, I've lived through many of them and I know that they're part of a natural cycle. Since I understand that downturns are inevitably followed by recoveries, I know that if I simply sit tight and wait, the "losses" I've experienced on paper will often turn into gains.
Of course, this doesn't mean that I'll never sell investments at a loss, but since the bulk of my money is in index funds that track broad segments of the market, it's very unlikely these investments won't recover from any downturns.
And as for the shares of stock I own in individual companies, I also buy them only if I feel secure that they have a strong competitive advantage and the type of solid leadership team that can see them through a crisis. That gives me confidence they'll also come back stronger after economic downturns.
4. I won't have to rely on the money for a long time
Finally, the biggest reason I don't worry if I suffer losses in my investment accounts is that I know I won't need to sell any of my assets for a long time. I only invest money I won't need for at least five years, and most of my investment portfolio consists of retirement accounts that I won't touch for decades.
When you have a short investing timeline, you can't always afford to wait out any downturns, and you could be forced to sell at a loss simply because you need the money. Because I make sure I never find myself in that position, I don't have to worry even if a recovery after a crash is slower than I'd hope.
By following these sound principles and ensuring that I'm not making unwise investing choices, I have the confidence to see my portfolio balance fall and do nothing but wait for brighter days.