Learn more about making an investment allocation change
3. Focus on time in the market (not market timing)
Long-term investing is about time in the market, not timing the market.
That's because no one knows exactly when the right time is to buy or sell. Besides, research shows that investors who try to time the market — buying low and selling high — usually fare worse than those who contribute regularly and stay invested for the long run. Historically, the market's biggest gains have come on a relative handful of days; if you're not invested on those days, it's very hard to make up for the missed opportunities.
That's why it's important to keep a long-term perspective. You invest to help secure the future you want — probably 10, 20 or even 40 years down the road. Even what feels like a big bump today will likely be a radar blip decades from now.
Consider: If you own a home, and someone told you its value went down this year, would you panic and sell? Likely, you wouldn’t. You bought your house because you knew you'd be there a while, so its day-to-day price isn't as important. Chances are your home's value will rise over time and that's what you are focusing on.
Look ahead, not back.
4. Rebalance your portfolio
In order to maintain a properly diversified portfolio, you should consider rebalancing it. The reason: Since different parts of your portfolio behave in different ways, eventually your asset allocation will likely drift away from your original target2. Most financial professionals suggest reviewing your portfolio at least once a year to make sure it still meets your goals and risk tolerance.
Let's say you start with 80% stock funds and 20% bond funds. Then, over the next year, your equities' (stocks') value rises so much, they end up accounting for 85% or even 90% of your portfolio.
Not bad — but also more risk than your strategy called for. This is where rebalancing comes in: You might want to sell enough stocks (and/or buy enough bonds) to get back to your 80/20 target balance.
5. The right move could be nothing at all
It might sound counterintuitive, but during periods of market volatility, your right course of action might be to take no action.
The reason: Unloading an investment that’s worth less than you paid for it turns a “paper” loss into a real one. And that can have consequences you didn’t intend. So before you make a move, it pays to understand the concept of “unrealized” and “realized” losses (or gains) and how they might affect your finances.
When you invest in stocks — through individual companies or through mutual funds or ETFs — you buy shares. The value of those shares can change for a variety of reasons. But in general, when broad swaths of the market rise or fall, those shares follow suit.
While you own those shares, any gains or losses you experience are “unrealized” — they show up on your statement, but not in your bank account. They’re not exactly meaningless. But other than affecting your ability to borrow against them (if you have a “margin” account at a brokerage), and maybe your stress level, they don’t mean much in the long run — you’re still invested, and your investment could still rise (or fall) in value. But once you sell, you “lock in” your losses (or gains) and they become “realized.” Besides getting paid, in the short term that means you’ll owe federal capital gains tax (if you made money) or can deduct the loss when you file your tax return.
Long-term, the sale could have a much bigger effect on your financial health. If you’re investing for a far-away goal like college or retirement, your investment won’t be there for the rebound. That’s important to know because, historically, the market’s best returns have come on a relative handful of days. If you miss those, your losses will be even harder to make up.
Acting on emotion may lead to irrational decisions — and hard lessons. If you develop a sound strategy and consider sticking to it, you'll likely be in a better position to pursue your financial goals.