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The Brexit — Britain’s vote to leave the European Union in June — rocked financial markets, sending tremors to nearly every corner of the globe.
It’s often tempting to panic and sell during a decline. But in periods of volatility, it’s crucial that long-term investors remain calm. Selling when prices are low — and buying when they’re high — can prevent you from accumulating wealth and reaching your financial goals. Instead, focus on your financial plan.
That’s simple, but not easy. Two key planning principles can help you stay the course when markets are unpredictable.
Follow your financial plan
A comprehensive, written financial plan lays out your investment strategy — among other things — based on your goals, time horizon and risk tolerance. It also helps you set and measure progress toward those goals, and a good plan takes market volatility into consideration.
Following your financial plan keeps you on track, whether that means sitting tight even when you want to act — selling during a decline, for example — or making small changes when you’d rather not budge.
Having a plan can also help you be more confident in your financial decision-making. For example, if you know that a short-term decline of 5% in your portfolio won’t impact your ability to retire — because your plan accounts for volatility — you might feel less compelled to make adjustments based on the latest headlines.
Make volatility work for you
Dollar-cost averaging, the practice of regularly contributing a predetermined amount to certain investments or asset classes, can help take the emotion out of investing decisions. By investing consistently, you get more shares for your money when prices are low — and you can start to view short-term declines as an opportunity for long-term wealth accumulation.
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Market gains make investors happy because existing shares increase in value, while declines also please them because they know they can purchase more shares at a discount.
Many investors already employ this strategy without realizing it when they contribute to a 401(k), 529 plan or IRA on a regular basis.
Long-term focus
As the Brexit panic subsides, it serves as another reminder that long-term investors should look past short-term potholes. Fear can be a powerful motivator, but hasty decisions based on sudden events rarely profit investors in the long run. Even worse, they can cause delays in reaching your financial goals.
Keep your focus on the long term, stick to your plan and don’t let your emotions get the best of you.