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When you look at the stock market with a historical perspective, it will help you to be less concerned about inevitable market fluctuations. The market posted dramatic losses from 1929-1932 during the Great Depression, but the S&P 500 was up by 46.6% in 1933. If you have staying power and are investing for the long-term, then you will be positioned to recover from downturns. Be aware, however, that the market can experience the largest portion of a rebound in only a few days. You have to stay invested to benefit from a rebound.
Here are some suggestions for keeping a healthy, realistic perspective on the market:
Don't panic. If a current downturn is affecting your stocks, then it has affected stocks across the board. Don’t make rushed decisions to move money into other stocks. Take the time to think about the pros and cons of any buying or selling decision you make.
Understand that a paper loss doesn’t mean you’ve really lost money. When the value of one of your investments falls, you have a paper loss. A paper loss will only result in losing actual money if you sell your shares before the price increases to a higher price than you paid. If you sell your shares when the share price is lower than the price you paid, then you will actually lose money on that investment. A paper loss is a maybe, but an actual loss is definite and irreversible.
Invest regularly for a lower cost per share on average. Investing a set amount of money on a regular schedule can help you weather market fluctuations. The contributions you make to your employer-sponsored retirement plan each pay period are a great way to ensure that you are investing at regular intervals on an on-going basis regardless of what the market is doing.* When prices are down, you purchase more shares; when prices are up, you purchase fewer. The additional shares you buy when prices are down will help you make the most of any future market upswings.
Select the right mix of investments for you and update the mix periodically. If there's one thing the market has taught investors, it's that selecting a variety of investments is important. Individuals who put all their money in one type of asset take a greater risk than those who spread their money across a variety of stocks, bonds, and money market instruments.
Set reasonable expectations. Learn about past returns on the investments you select. If a particular stock has earned an average of 12% for the past 50 years, it would not be reasonable to expect it to earn 30% for the next 50. Although past performance cannot predict future results, you should not expect dramatic upswings or downturns without any basis for these expectations.
Keep long-term goals in mind. As long as your investments are fundamentally sound and fit your financial goals, a temporary downturn in the market should not sway you.
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