We all know that the stock market is volatile, so by definition the value of your portfolio will jump around in the short run. However, it seems almost human nature to be disappointed when your inflated stock value drops to a reasonable level, even though it is pretty much destined to do so. This thought process may discourage you and you may be tempted to sell, even though these are just the natural rhythms of the market!
So how can you avoid this error in thinking? Let’s say you initially invested $1000 in a stock that was speculated to grow quickly. The stock then grew to an overvalued level of $1500 before dipping back to $1200. Instead of being disappointed that you “lost” $300, by valuing your investment returns by your initial investment you can be reasonably happy that you gained $200. This type of thinking acknowledges the fact that stock prices often become over/under valued, and encourages you to stay calm when they do. This mindset is especially important for those who are following a buy & hold strategy, and are hoping on the gradual growth of the market to provide their returns.
Although changing how you think can seem easier said than done, what can help with incorporating this strategy is to check your stock values infrequently. By setting a comfortable interval for when you check your stocks you can avoid being exposed to the constant ups and downs of the market, and you can appreciate a more realistic value of your portfolio.
By holding onto your stocks through short term fluctuations you can avoid stress, unnecessary fees, and disappointment when the value eventually bounces back.
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