As the stock market has hit pockets of turbulence over the past several weeks, you may suddenly find yourself thinking a lot more about what to do with your investments. After a nice run since last summer, you might be tempted to take your profits and cash out. On the other hand, you might think that a 5% drop is a great chance to load up on some stock bargains. With all the attention the markets are getting, you might feel like you've got to make some changes.
Yet time and time again, the best way to handle the ups and downs of the markets has been to come up with a plan you can live with and then stick with it. Too often, giving in to emotional responses can spell disaster for your portfolio. How many times have you succumbed to panic and hit the sell button on a mutual fund, only to discover that you sold at exactly the wrong time?
What could have been
When the markets are gyrating wildly, it's too easy to play the what-if game. Sure, if you had sold your entire portfolio in mid-February and bought a bunch of index put options right before the 400-point drop in the Dow, then you would've made a bundle.
Everyone agrees that stocks can't go straight up forever. Inevitably, rising stock prices will correct. The problem is that unless you have perfect foresight, you'll never know exactly when that inevitable downturn will take place. If you'd decided last September or October that it was time for stocks to fall, you would have missed out on substantial gains -- and if you'd gone ahead with that put option strategy, you would've lost your shirt.
Many right answers
The discipline to stick with your investment strategy through thick and thin is actually more important than exactly what strategy you choose to follow. If you're a proponent of passive investing, then stock index funds like international ETF iShares MSCI EAFE (AMEX:EFA) or Dow tracker Diamonds Trust (AMEX:DIA) might be the cheapest way for you to get the exposure you want. If you prefer individual stocks with high dividend yields, then companies like Coca-Cola (NYSE:KO), DuPont (NYSE:DD), or Verizon (NYSE:VZ) might catch your eye.
But the worst thing to do in response to a drop in stock prices is to give up on your strategy. Of course, if your portfolio's value is dropping when the rest of the market is going up, then you might want to take a closer look to see if there's something wrong with your investing methodology. When everyone's losing money, however, you should probably expect to suffer some losses of your own. Panic selling can lock in losses that would only have been temporary.
Because acting rationally is tough in the face of market uncertainty, the best investment strategies have built-in guidelines for both buying and selling. That way, if your financial plan is sensitive to market movements, you always know how to respond to changing stock prices. Yet even if you don't have a specific selling strategy, the best move for money you don't need right away is not to move a muscle. Not clicking that sell button can save you a lot of regret later.
Recent stock volatility is a valuable reminder that ups and downs are all part of investing. While the risk of declining prices is always there, history has shown that you can reach your goals over the long term by remaining courageous in the face of apparent danger.
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Fool contributor Dan Caplinger felt himself reaching for the mouse in late February, but he just said no. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy keeps you rational.
