The selloff in stocks has everyone wondering if the dreaded market correction is here. The S&P 500 Index (GSPC) is down nearly 6% from its Jan. 15 high and both the S&P and the Dow Jones Industrial Average (DJI) are sitting at their lowest levels in eight months. Though a healthy pullback is long overdue, that's not much solace for those who find themselves suddenly terrified over their portfolios. If you're one of those unlucky few there's no need to panic. By getting in front of the selling and managing your emotions you'll be able to weather the market storm without losing the shirt off your back.
Here are five simple rules to follow when the market gets ugly:
Rule #1: Don't ignore it.
In 2008 more than 50% of brokerage clients simply stopped opening their statements. It's psychologically very hard to see losses but if you ignore your money it'll go away in a hurry.
Look through your holdings. If you have positions with big gains and you're nervous, either take profits now or put in a stop order.
Rule #2: Don't let a gain turn into a loss because you're afraid to pay taxes!
Your cost basis doesn't matter right now. We've seen some tremendous gains over the last couple years and if you've owned stocks you've done better than you could have imagined. Those gains can disappear faster than you think.
Think about Amazon (AMZN). Now it's down 20%. If that happened to your Tesla (TSLA) or Facebook (FB) or Twitter (TWTR) would you panic? Would you sell? How would you feel? The real goal of investing is to make money. If you're sitting on huge capital gains you've achieved the first half of your mission. Now it's time to take some gains.
Rule #3: Sell until you can sleep
Yet another mental rule. If you spent last night staring into the ceiling because you were worried about your investments your mind is telling you that you're too exposed to the market. Sell something.
Rule #4: Don't short and don't chase rallies!
Selloffs are more emotional than bull markets. The moves are huge and unpredictable.
Four of the five biggest one-day point losses in the history of the Dow occurred between Sept. 29 and Dec. 1 of 2008. That's not surprising but what you wouldn't guess is that the three biggest one day rallies took place over the same two months.
Bear market rallies have a tendency to suck you in and convince you to buy. You'll feel like you missed the lows and lose discipline. Ignore that emotion.
Rule #5: Now is not the time to become a trader
Stick to your long-term financial plan. Look for opportunities but be very, very patient.
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- Dow Jones Industrial Average