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Why should you sit away from chaos

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Why should you sit away from chaos

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It is not investments that are tested in turbulent markets; they are investors.

At noon on Monday, the Dow Jones Industrial Average fell more than 1,100 points and the Nasdaq Composite Index tumbled nearly 5%. They recovered to close slightly for the day, then sank again early Tuesday before rising again. The Nasdaq Composite Index is down about 12% since the start of the year.

The steep declines came after nearly two years of almost relentless price rises, even for many stocks that professional investors considered garbage. After such widespread gains, small dips are larger than when losses occur with more typical frequency.

Above all, what matters is not what the market does, but what you do in response.

As I wrote in 2014:

Individual investors should ignore the futile efforts of commentators and strategists to extrapolate the latest market moves into a prediction of what will happen next. Instead, use recent volatility to make an honest reassessment of the type of investor you are and the level of risk you can bear….

If you’ve been glued to TV or financial websites, obsessed with the sight of falling arrows and blushing charts, then this year’s short-term turbulence has already revealed something about yourself that has a enormous long-term importance: you probably have too many things to do actions.

This is especially true if you retired at the start of 2020; the best guide to how you will behave in the next crash is how you acted in the last one. If you can’t take the pain, you shouldn’t be ashamed to stand or move on the sidelines.

Whether you reduce your stocks or not, the more frequently you check the evolution of your portfolio, the more volatile it will be. Try turning off your phone, moving it to another room, removing trading apps from your home screen, all to build positive habits and improve your investing hygiene.

On the other hand, if you can control it, fear is “the best fertilizer for future bull markets,” as I wrote in 2011.

Stock market panics are indispensable market hygiene, the natural way in which overvalued assets realign, making future returns more attractive.

Every investor should be grateful that stocks are falling, for two reasons.

First, if stocks were still going up, they would be risk-free and their returns would end up being paltry. The pain of short-term loss is the price we pay for the potential for significant long-term gain.

Second, if you have enough cash and courage to resist further declines, fear of others might spur you into action. As I wrote in 2009: “Sometimes they say that to be a smart investor, you have to be emotionless. It is not true; instead, you should be inversely emotional.

This means that market declines need not be cause for consternation. They can be an opportunity.

Write to Jason Zweig at intelligentinvestor@wsj.com

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