Holy Crap the Sky is Falling: Be Mentally Prepared for Drops

sky
Sky Looks Good!

The markets, crypto, and even home prices in some areas of the USA have been fun so far in 2018.  They go up big, then they drop suddenly.  At the beginning of February the market dropped back to November’s numbers in the stock exchange.  For Crypto it was up 40,000% for 2017 and dropped 98% over night in 2018.  This is heart breaking if you are a new investor, but you shouldn’t invest if you can’t handle the drops.

You have to be a realist in investing and understand that over a short amount of time your will have drops.  Nothing goes up forever and doesn’t drop some.  But in the long run most smart investments will continue to go up over the long term.  The stock market is definitely up from 30 years ago.  Thinking long term is a major key.

You also have to not be emotionally invested in your money.  A drop of $10,000 of your net worth is not a reason to panic and sell it all.  You are a rational thinker, and it will go back up and over a long enough time line you will make money again.  If you are an emotional person, just don’t look at your investments until you are ready to use them for something, or look quarterly or once a year just to analyze any changes you might want to make.

You also need to be a “the glass is half full person” to handle a drop in the market.  I heard a retired guy in 2008 tell me he lost $400,000 in his portfolio.  I crapped my pants a little hearing this.  He then smiled, and said, “But I really haven’t lost any money unless I sell.”  He knew the glass spilled a lot of water, but it was still half full.  He eventually, gained it all back and some over the last ten years.  He is still an optimist and knows that over a long enough time he will make money in his investments.

Sky2
Morning Sky is still Looking Good!

You also need to be building your wealth with multiple markets, multiple investment types, and make sure it is well balanced.  Volatility is great for quick profits, but it is the first to crash, so have safer funds in place to balance out the potential loses.  I stay with stocks, but the bulk of my investments are in balanced mutual funds that follow the markets.  I have international funds to balance out domestic funds, and a fun volatile pot stock fund, that maybe will do something big (fun money).  Who knows as it is currently dropping and losing me money.  Maybe this summer it will go up as more states and Canada legalizes medical and recreational marijuana (long term thinking).

So, if you are emotional, irrational, or unbalanced in your investments the sky may be falling for you.  But, you can rebalance your money, and prepare for drops mentally.  The markets will drop again (it’s cyclical), and they will recover again, so relax and expect this.  Enjoy the ride and tell your war stories from years past.  We all have our war stories in investing, so take pride in your

 

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2 Comments

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  1. I lost $169 K of value in my portfolio in the recent correction, although almost $69k of that has recovered. And that is with less than 50% of the portfolio being in stock. But I’m a boomer and have weathered almost a dozen corrections and global upsets in my investing career and am proud to say I haven’t ever sold a single share in a dip or a plunge. You either have to have a brilliant exit plan, I didn’t, or just stay the course. If you don’t panic you will win in the end. I’m early retired now with surplus funds only because I didn’t react to scary news.

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