| I received a semi-panicked call last week from a good friend who was concerned about all this market volatility. Since I oversee the personal finance coverage at CNBC, he wanted to know what sort of plans I had cooking to protect my investments.
I told him my answer was actually simple: I was doing nothing.
I have created a diversified portfolio that I am very comfortable with, and this has allowed me to manage any risk by spreading out my investments. Basically, I have avoided putting all my eggs in one basket.
It's obviously a nerve-wracking time for investors right now as the stock market continues to slide. And downturns like these can feel quite daunting and keep you awake at night regardless of how long you have been an investor. That's why for many investors, it may be tempting to consider cashing in all the chips. I get it. I understand why people have that helpless feeling and think that it's time to pull their money out of the market.
But is that really the right decision for you to make?
Here are some things I told my buddy on that call that you may also want to consider before doing anything drastic.
In theory, it may seem like a smart idea to pull your money out of the stock market right now. So if you decide to reinvest later when stock prices are at their lowest, you could make a very nice profit when the market rebounds. Here's the problem with that theory: it involves timing the market and that, my friends, is extremely difficult to do.
If you do decide to sell your stocks now, there's always that chance that stock prices will quickly rebound and you'll miss out on those potential earnings.
Remember, once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss. Cash doesn't grow in value; in fact, inflation erodes its purchasing power over time. Cashing out after the market tanks means that you bought high and are selling low — the world's worst investment strategy.
As I told my friend, my advice is to do nothing.
Now, that may seem counterintuitive, but the best way to survive periods of market volatility without actually losing any money is by holding those long-term investments and waiting it out. During any market downturn, your portfolio will take a hit (some worse than others) and will likely lose value in the short term. You need to keep reminding yourself that you don't really lose anything unless you actually sell. By holding your investments until stock prices eventually recover (and they always do), you can ride out the storm without losing anything.
The key is focus on the future and stick with your long-term investment plans, despite all the volatility.
As the Oracle of Omaha, Warren Buffett, said: "Nobody buys a farm based on whether they think it's going to rain next year. They buy it because they think it's a good investment over 10 or 20 years."
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