By Craig Erwin, Ph.D.
There is a great deal of sabre rattling on the Russian-Ukrainian border, and it could lead to a full-blown war. What should investors do? Nothing. Why nothing? Because, if you do something, you are likely to let your emotions drive your decisions, which often leads to mistakes. Don’t sell your stocks and hide the cash under your mattress. Just try to relax and realize that, just as all things must pass, this crisis will pass too.
It seems reasonable that stocks will plummet during a war and they may well plummet when the war begins. But they can bounce back surprisingly quickly. Remember how quickly they bounced back after the Covid-19 selloff in 2020? And get this – stock prices actually rose 50% during World War II, over 7% per year.
When war is imminent, you may panic, thinking it wise to sell your stocks. Don’t do it. Stocks may decline, but you can’t be sure of it, and you have no idea how slowly or quickly they will bounce back.
If emotions drive your decisions, you are likely to do stupid things. Buy and hold, no matter what. If you try to predict when it’s a good time to buy or sell stocks, which is called market timing, you will often be wrong. That’s costly. It is far better to use dollar-cost averaging than market timing. To use dollar-cost averaging, simply buy stocks regularly like clockwork, no matter whether you think it’s a good time to buy or not. What works best is to have money withdrawn from every single paycheck and invested in a stock index fund.
So, whether there is a war or not, you know what to do. Nothing. That is if you are already dollar-cost averaging. If you are not, what on earth are you waiting for?
Is the news about Russia and the Ukraine affecting your decisions? Are you dollar-cost averaging? Do you let your emotions drive your decisions?
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