How to Handle Market Declines

You wouldn’t be human if you didn’t fear loss.

Nobel Prize-winning psychologist Daniel Kahneman demonstrated this with his loss aversion theory, showing that people feel the pain of losing money more than they enjoy gains. The natural instinct is to flee the market when it starts to plummet, just as greed prompts people to jump back in when stocks are skyrocketing. Both can have negative impacts.

But smart investing can overcome the power of emotion by focusing on relevant research, solid data and proven strategies. There are seven principles that can help fight the urge to make emotional decisions in times of market turmoil. Here is one of them….

1. Market declines are part of investing

Over long periods of time, stocks have tended to move steadily higher, but history tells us that stock market declines are an inevitable part of investing. The good news is that corrections (defined as a 10% or more decline), bear markets (an extended 20% or more decline) and other challenging patches haven’t lasted forever. (see the graphic)

The Standard & Poor’s 500 Composite Index (aka The S&P 500) has typically dipped at least 10% about once a year, and 20% or more about every six years, according to data from 1952-2021. While past results are not predictive of future results, each downturn has been followed by a recovery and, over time, a new market high.

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