Why the Markets Go Down

Stock markets have been and always will be volatile. In a single day, the market can fluctuate hundreds of points one way, and back the opposite way before the bell rings at the end of the business day. The average daily swing for the last 40 years has been +/- 1.4%. 

 

It’s the nature of markets to go up and down, yet journalists always present the question, ‘Why did the markets go down?’ as something that shouldn’t be happening. In fact, the U.S. stock market has had intra-year declines of at least 10% about every other year. And, despite these intra-year declines, the U.S. stock market (S&P 500 index) has averaged over 9% per year of growth over the last 50 years

They always try to give a reason - inflation, recession, the markets overheating - but rarely are these answers accurate. 

 

So many academic studies have shown that  trying to predict when the market will go up or down is a  fruitless exercise. 

The historical data tells us that ever since the market first opened, it’s been in constant flux, with an upward trend over time.

 

Yet, no matter how much we’re told that gains and losses are a part of life, there’s still a part of us that wishes to control everything.

 

What Frequently Checking Your Portfolio Increases

 

While any attempt to predict and try to protect ourselves from market downturns is futile, I see so many people checking their portfolios repeatedly on any given day. It’s as if checking our portfolios more often will protect us or make the market go up. 

 

A check-in with your stock portfolio nowadays is as simple as pressing a few buttons on your phone or laptop, and while you may think that checking it more often is a good habit, in reality, it isn’t. 

 

Daniel Kahneman, a Nobel Prize winning economist and psychologist has found that the more you check the stock market or your portfolio, the less money you’ll make.

 

The reason is that the more often you look at your portfolio, the greater your chances of seeing it when it’s down, which increases the odds that you’ll make an emotionally charged, impulsive decision such as selling off stocks way too soon. The inevitable result is financial loss, not to mention increased stress. 

 

How Often to Check Your Portfolio

 

History shows that in the long run, the overall stock market has been consistently trending upward. . This means that people who remain patient through market downturns and refrain from frequently looking at their portfolios actually earn more money. It is recommended to check your portfolio one every year, or once every quarter.  


Here are some tactics to prevent emotionally charged decisions and financial loss:

 

  1. Forget trying to predict the market by realizing that doing so is causing unnecessary stress and damage to your financial growth 
  2. Know that the market will naturally go up and down and that you don’t have to react to it
  3. Take a break from checking your portfolio until your advisor says it’s time for a review
  4. Practice patience and only look at your portfolio once every four months

 

How we respond to downturns in life and in the market is the only thing we can control

 

So, the next time you find yourself logging in to your computer or phone to look at your portfolio, stop! Instead, take a few deep breaths knowing that refraining is the best choice to not only earn more money but also foster a healthier state of mind and an improved sense of well being.

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