When the markets roil, many advisers stick to the same mantra: Stay with the long-term plan. Don't do anything rash. In fact, don't do anything at all. But even for committed buy-and-hold investors, that's easier said than done. The market is officially in roller-coaster territory now. Two weeks ago, the Standard & Poor's 500-stock index was up a very respectable 5% for the year. As of Thursday, the index went negative. A sunny jobs report this morning offered some respite -- albeit brief. Investors finding it tough to stick with their long-term investment plan these days are not alone. Most investors buy high and sell low, most of the time, say experts. "I've gotten a ton of calls today," says David Peterson, president of Peak Capital Investment Services in Highlands Ranch, Colo. "But the advice I've given is not to panic. We've gone through corrections before and if you look at where the market was a year ago, we're still up from that."
Sometimes, panic can be instructive, advisers say: If a long-term plan only looks good when the market's going up, then maybe it's not such a great plan. After all, a solid investment strategy should be tailored to include enough risk-taking to help you achieve your long-term goals, but not so much that you freak out over every decline in the market. But if this is a question of mind over matter, there are strategies that can help you do the right thing.
Any decisions you make during a volatile period will be colored by your emotional state, says Terrance Odean, a finance professor at Berkeley's Haas School of Business who has studied investor behavior. "You don't want to be making your decisions under emotional duress," Odean says. "Movies are good. I once under similar circumstances read three of Raymond Chandler's books in a row. If you're in California, you might consider the beach." If you can temporarily avoid thinking about the temptation to sell your holdings to avoid further losses, advisers say, it's often enough to get you back on track and refocused on your long-term investing goals.
Consider the big picture
Of course, tuning out isn't for everyone. E*Trade customers took the opposite approach on Thursday; logins to the online broker's mobile trading platform were up 30% compared to the previous week, and mobile trades hit an all-time high, nearly twice as many as the previous week's average. Whether you're tuning in or tuning out, try to keep things in perspective: Take a deep breath, and take a look at a one-year chart of the market, says Christopher Larkin, E*Trade's senior vice president of the U.S. retail brokerage. "It's really going to ease your mind," Larkin says. (Really: On a year-long chart, the market's still up.)
Think of it like a fire sale
Having a long-term investing plan doesn't mean sitting on your hands, says Fran Kinniry, a principle in Vanguard's Investment Group. If you want a portfolio that's half stocks and half bonds, you've got to buy stocks when prices drop and sell when they rise to keep things in balance. Sure, most investors do the opposite. But how do you feel when you walk into the mall and spy a 50% off sign? "In most purchases, the way to get people interested is put them on sale," says Kinniry. "And the reality is that the market is cheaper today than it was yesterday."
Investment options have been growing exponentially since the market downturn in 2008, as more investors want better protection against losses, Larkin says. After a sharp slide, the cost of such portfolio insurance does rise, but it's still out there for investors who decide the protection is worth the cost, he says. For example, buying a put option gives you the right to sell a stock at a set "strike price" until a certain date; the value of the option increases the further the stock falls below that strike price. While prices for such options vary, recently you could protect a $120,000 position in the SPDR S&P 500 ETF (SPY) for about $7,500, or 6% of its value, according to data provided by E*Trade.
Sell to your sleeping point
In some cases, selling part of a position so you can sleep better at night isn't such a bad idea, says Marc Pearlman, an investment adviser based in Williamsville, N.Y. "For the person who's prepared, they already know that under these circumstances they might take a loss and it's not a panic," Pearlman says. However, this strategy shouldn't be relied on to unmethodically dump positions. Pearlman recommends making the tiniest possible change needed to calm your nerves but still maintain your stakes until things settle down.
Remember how this feels
When you sit down to make or revise your long-term financial plan, you probably do it at a moment of relative calm. "Our appetite for risk depends a good deal on our emotional state," Odean says. What seems like a reasonable amount of risk when you're feeling good might seem insanely reckless on a day when the market plunges. The next time you're going over your plan, consider dialing back the amount of risk a bit, "acknowledging that when fear grabs you it's hard to stick with the plan, and starting off with a more conservative plan than you would if you were Spock from Star Trek," Odean says. To help investors figure out their true risk tolerance, E*Trade offers portfolio stress tests, showing how much a given investment might lose in a repeat of various market calamities, Larkin says.