When Investors Lose Their Nerve

This is the market-timer’s dilemma in real time – trying to outguess short-term moves instead of sticking with a long-term, risk-appropriate plan.

This week’s post dives into that very topic. Several reader comments landed in my inbox recently, and they all highlight the same challenge: the temptation to jump in and out of the market entirely, or to change strategies based on short-term noise.

Here’s why that approach is so dangerous, and why staying invested through the ups and downs is almost always the smarter move.

Honestly, I worry whenever I receive a bunch of emails from nervous investors. Worried that investors are going to abandon their sensible index funds at the faintest threat or whisper of adversity.

Here’s what a few of them said:

“We sold 70% of our (global equity) holdings in early September, since September tends to be a negative month for markets. We put the cash into a short-term GIC and now that it’s matured, we’re wondering if we should dollar-cost average back in or go lump sum. FOMO is starting to creep in since the market has been soaring higher.”

And they’re not alone. Another reader recently shared:

“With the unknowns surrounding Trump and tariffs I converted our savings to cash around the end of May and am currently earning 2.75%.”

Then came an email that struck a similar chord:

“I am wondering if one should add some gold ETFs to their portfolio to hedge off any downturn in the market? I read an article from Ray Dalio concerning having some gold—15% or so—in your portfolio.”

These are all versions of the same worry: maybe diversification isn’t enough. Maybe this time is different. Maybe a tweak or two will protect me from the next downturn.

Look, investing is hard. When markets are roaring, it’s tempting to chase the hottest stocks or indexes. Tech stocks, the Nasdaq, even the S&P 500 all look shiny when they’re leading the pack. Meanwhile, holding a global index portfolio feels boring and vanilla, even though returns have been strong and diversification quietly spreads risk across thousands of companies and dozens of countries.

I worry too. I worry that investors chase returns in rising markets. But I’m even more worried that they’ll abandon their risk-appropriate portfolio when markets fall.

And markets will fall. That’s not a flaw, it’s a feature of investing. It’s the very reason stocks offer higher long-term returns than cash, GICs, or bonds. The “risk premium” exists because investors have to stomach temporary declines along the way.

That’s also why I recommend asset allocation ETFs. You get globally diversified growth during good times, and that same diversification cushions (not eliminates) losses during downturns. Index funds aren’t magic. When markets fall, your portfolio will fall. That’s how it works.

The key is staying the course. It’s painful to watch your portfolio drop, but history shows that trying to time the market, selling and then figuring out when to buy back in, almost always leads to worse results than just holding your risk-appropriate mix and riding it out.

We saw this in 2022 when investors fled to 5% GICs, only to miss the sharp rebound from 2023 through 2025. Markets can recover faster than most people expect, and missing just a handful of strong days can derail long-term returns.

So yes, we’ve had a good run lately. The “Liberation Day” tariff scare from the spring feels like ancient history now. But eventually markets will drop 10, 20, maybe even 30%. Long-term investors in global index funds know this will happen and should not be surprised. Those drops are temporary. Over time, the line still moves up and to the right.

For retirees or near-retirees who’ve been flying a little too close to the sun with their equity exposure, now’s a good time to set up your 10% cash wedge to help facilitate future withdrawal needs. You can do that in a few ways:

• Sell a small slice of your ETF holdings while markets are high.
• Turn off dividend reinvestment and direct those distributions into a HISA ETF.
• Put new contributions into that HISA ETF until you reach about 10% of your portfolio in cash by the time you retire.

That small cushion will give you peace of mind when the next correction hits so you don’t feel tempted to abandon your plan.

Stay diversified. Stay invested. And most importantly, stay the course.

The original post was published here By Robb Engen

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