If shares are falling, do not make this error

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Shares fell sharply on Monday amid fears the coronavirus pandemic would be difficult to overcome

The Dow Jones Industrial Average ended the day down 725. The S&P 500 lost 1.6% and the Nasdaq Composite lost 1.1%.

Despite the uncertain times, history has shown that the stock market gives more than it needs.

According to calculations by Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore, the average annual return on stocks between 1900 and 2017 was around 11%. Adjusted for inflation, this average annual return is still 8%.

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Because of this, Rob Williams, Charles Schwab’s vice president of financial planning, says, “For longer-term investors, we recommend staying on course if possible.”

In fact, if you want to reap the rewards of investing, you will have to absorb the losses.

Williams provided an example: Over the past 20 years, the S&P 500 has had an average annual return of around 6%. But if you missed the best 20 days in the market during that period because you believed you should sell and then reinvested later, your return would shrink to 0.1%.

“Pain is a sign that you are investing well,” said Allan Roth, certified financial planner and founder of Wealth Logic in Colorado Springs, Colorado.

That being said, there are a few steps nervous investors can take.

For example, you should make sure you have enough cash on hand to cover any upcoming major expenses, including school fees and planned vacations, said Milo Benningfield, CFP and founding director of Benningfield Financial Advisors in San Francisco.

“If not, consider raising cash out of your portfolio rather than later after the markets have fallen,” he said.

In the meantime, senior investors may want to optimize their portfolios to ensure they are ready to exit the job market, said Doug Bellfy, CFP at Synergy Financial Planning in South Glastonbury, Connecticut.

“I find that investors who are about to retire sometimes need to be persuaded to reduce risk and build cash reserves,” he said.

How Much Cash Should You Have? At least two years of living expenses, he said. “But more can be better when you have the opportunity to save more,” he said.

That way, if a bear market hits close to your retirement, you don’t have to reach into your portfolio at discounted prices.

“Avoid the temptation to pay off your investments in full,” said Benningfield. “You may have two to four decades to cover the expenses.”

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