It's a story that's played out way too often.
. Panic-stricken investors dump everything rather than losing all
their money in the inevitable crash. But the inevitable crash
doesn't happen, and the market regains all of its losses. It's no
wonder so many people think the markets are rigged.
panic-sold last week
, you're not alone. But succeeding at investing comes down to
breaking the cycle of self-destructive emotional responses to bad
markets. If you want to stop seeing episodes like this happen again
and again throughout your investing career, you need to clamp down
on what may seem at the time like a perfectly rational response to
Losing the battle to win the war
Financial TV channels make you feel like an idiot when you lose
money in the market. Watching them, you'd think that if you were
only sophisticated and nimble enough, you could always avoid losses
just by making the right moves fast enough.
But in reality, even the best
market mavens make dumb moves
. The key, though, is that they don't let those mistakes define
them. Rather, they learn from them -- and move on to bigger and
better things. So if you're finding yourself on the sidelines now,
here are some tips on what to do next.
1. Don't just buy everything back.
Like kids with their hands in a cookie jar who hear their parents
come home, your first impulse when you make a mistake with your
investing is to put everything back where it was. That would mean
buying back everything you sold last week.
But realize that whatever you had in your old portfolio made you
scared enough to panic, and so restoring everything to the way it
was leaves you vulnerable to future panic attacks as well. Instead,
take this as an opportunity to rearrange your investments in a way
that you'll feel more comfortable about and will make you
less likely to freak out
the next time stocks dive.
2. Judge what to do based on how particular stocks and
sectors have done.
Sure, the overall market may be back where it was before last
week's roller-coaster ride. But that doesn't mean that every stock
is back to normal.
For instance, financial stocks are still reeling from the
implications of the European debt crisis. Not only is Wall Street
) down from its levels a week ago, but regional players
(Nasdaq: ZION) , and
) are also off sharply as they try to balance the Fed's long-term
commitment to low rates against a slowing recovery. Similarly,
cyclical stocks like consumer-goods packaging maker
) and homebuilder
) still find themselves way below their levels from before last
week. If the economy slips into a double dip, then those stocks
could get cheaper still -- and staying on the sidelines may be the
best place to be for now.
Conversely, you've missed the boat on some other sectors. Tech
(Nasdaq: CSCO) and
have moved up sharply on positive news, so trying to replace them
now would cost you a lot. You'll likely be better off finding
alternatives that still have room to appreciate.
3. Give yourself some time.
The biggest fear people have after a panic is that they'll miss a
huge run upward. That happened last year after a bad August.
But in the long run, it's much more important for you to get a
handle on big-picture items. First, how much risk can you take in
your portfolio without panicking at the first sign of a downturn?
Second, what's the best way to align your portfolio to reflect that
risk tolerance while still letting you meet your goals? In most
cases, you'll find that adding some new investments to replace
other higher-risk ones will get the job done easily and
4. Leave yourself a time capsule.
The next time panic strikes, you won't remember how you felt
the last one -- you'll only remember that panicked feeling. So
write yourself a note expressing your emotions both during and
after this latest panic. Hopefully, that will help you calm down
during the next crisis so that you can take better-considered
It's not too late
Just because you made a mistake and panicked last week doesn't mean
that you're doomed to failure. All you have to do is learn from
that mistake, and you'll end up being a better investor than you
If you need new stocks for your portfolio, we've got some ideas
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hasn't panicked so far. You can follow him on Twitter here. He
doesn't own shares of the companies mentioned in this article. The
Motley Fool owns shares of KeyCorp, Yahoo!, Cisco, and Citigroup;
and has created a bull call spread position on Cisco. Motley Fool
newsletter services have recommended buying shares of Cisco and
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doesn't have a panic button.
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