This comprehensive guide will prepare you with the knowledge you need to make informed decisions when the stock market turns down.
Stock markets epitomize economic prosperity and serve as a gateway to financial wealth for many. Much has been said and felt about the soaring profitability that almost has an incomprehensible ability to draw people in, followed by gut-wrenching dread that comes with a fall. One such random place is the stock market, in which a market has literally blown out the wind of investors. Its fickleness has left many in its wake
Obviously, they do exist: the crashes in markets. They are set off by the like of recession, geopolitical tension, corporate scandal, and changes in sentiment among investors. It is hard to resist the plunge into panic, fear, and uncertainty when things do go wrong in the markets. However, a well-educated investor who has kept his head cool might find a strategic course through these stormy waters.
Understanding Your Risk Tolerance- A Lifesaver in a Down Market
Your risk profile is key to your ability to stomach a downturn in the stock market; bumpy sea. But basically, it's a measure of an individual's comfort that there is the possibility of loss against the gain.
- How It Helps in Market Downturns:
✓Avoiding Panic Selling: The selling of the portfolio due to panic can be avoided when markets are declining by checking the proper risk tolerance. Thus, it has been noted that most of the decisions, specially those regarding selling, are wrong due to the emotional element. Once knowing one's limits, the person will stick to the investment plan.
✓Informed decision-making: Knowledge about what your risk tolerance allows for the understanding that decisions have to be made with the portfolio. For an ultraconservative investor, it may require rebalancing away from equities. For a more aggressive investor, it is looked at as an opportunity to buy the shares while they are on sale.
✓Less Worry over Investment Results: Your risk tolerance will help you keep more insulated from most of the stress associated with the rise and fall of markets. If you are invested in levels that are within your risk tolerance, then you probably are not going to lose sleep over something that is really of no consequence.
✓Long-term Horizon: Risk tolerance therefore, allows one to be patient about a longer-term time horizon. It's simply because short-term market volatilities may cause worry for an investor, but at the mind's back that can tolerate the risk more is that over time, markets tend to revert.
✓It shall definitely defend your financial objectives: Stay invested by your risk profile, and most likely you'll reach your long-term financial goals. Panic selling can knock those off the rails.
✓Informed decision-making: Knowledge about what your risk tolerance allows for the understanding that decisions have to be made with the portfolio. For an ultraconservative investor, it may require rebalancing away from equities. For a more aggressive investor, it is looked at as an opportunity to buy the shares while they are on sale.
✓Less Worry over Investment Results: Your risk tolerance will help you keep more insulated from most of the stress associated with the rise and fall of markets. If you are invested in levels that are within your risk tolerance, then you probably are not going to lose sleep over something that is really of no consequence.
✓Long-term Horizon: Risk tolerance therefore, allows one to be patient about a longer-term time horizon. It's simply because short-term market volatilities may cause worry for an investor, but at the mind's back that can tolerate the risk more is that over time, markets tend to revert.
✓It shall definitely defend your financial objectives: Stay invested by your risk profile, and most likely you'll reach your long-term financial goals. Panic selling can knock those off the rails.
- Note:
Risk tolerance is not static. It keeps on changing with time due to several aspects regarding age, financial situation, and your goals in life. It is thus indispensable to have your investments reassessed once in a while to ensure they still lie within your comfort.
Be prepared to Embrace Volatile Markets to Avoid Massive Losses When Market is down
Such as how securing before the storm one can proactively be able to process what can be done to avert or at best soften the blow of a downtrend in the market. Here is how:
- Understand the concept:
Market volatility gives a signal that changes in the prices of assets are quickly and unpredictably made. It could also be one of the causes of a bearish stock market.
- Benefits of Preparing:
✓Emotional resilience: investor can easily handle the emotional burden presented by tops or bottoms of markets much better, since some of the buildings will obviously fall and others will be in built. The two largest emotions, fear and panic, do drive impulsive decisions for liquidation of their assets most of the time at losses.
✓Financial safety net: So perhaps proper preparation would be to maintain a risk-diversified portfolio for the asset classes. When one class does badly, the others may help to buffer the losses.
✓The long-term perspective: A good investment strategy is conscious of long-term financial goals. Commitment to the plan, during periods of turbulence or in times of market distress, helps one not to be swayed by emotional decisions, which essentially will work against reaping long-term benefits.
✓Opportunity Recognition: Most often, this works for most investors if they perceive a falling market as an opportune moment. It is an opportunity to get to buy at low prices; hence, they can take advantage of market turmoil and purchase the asset conveniently.
✓Risk Management: Preparation would involve having set risk tolerance levels and maintain them. This ensures that you don't have more volatile asset in your portfolio that in the long run will harm your investment.
✓Financial safety net: So perhaps proper preparation would be to maintain a risk-diversified portfolio for the asset classes. When one class does badly, the others may help to buffer the losses.
✓The long-term perspective: A good investment strategy is conscious of long-term financial goals. Commitment to the plan, during periods of turbulence or in times of market distress, helps one not to be swayed by emotional decisions, which essentially will work against reaping long-term benefits.
✓Opportunity Recognition: Most often, this works for most investors if they perceive a falling market as an opportune moment. It is an opportunity to get to buy at low prices; hence, they can take advantage of market turmoil and purchase the asset conveniently.
✓Risk Management: Preparation would involve having set risk tolerance levels and maintain them. This ensures that you don't have more volatile asset in your portfolio that in the long run will harm your investment.
- Key Strategies for preparation
•Diversification: Spreading or dispersion of assets across different classes would reduce impact of the downturn in any single asset class. Kinds of classes are Stocks, bonds, and real estate.
•Emergency Fund: Keeping a cash reserve to fall back on in emergencies will prevent the forced sale of investments at low prices on account of market downturns.
•Long-term Investment Horizon: Invest a portion of your long-term goals, and do not get swayed by the rise and fall of the market in the near term.
•Systematic Rebalancing: It can reduce your risk exposure over time from market fluctuations by periodically realigning, or rebalancing, your investment back to the original asset allocation target.
•Dollar-Cost Averaging: This provides an investment at an average share/unit price lower than what the market fluctuation experience would produce, with the use of a fixed dollar amount taken from waiting to be invested at periodic intervals.
•Know the numbers: how market cycles and investment principles can let you know what to do.
Proper preparation therefore, to the Great Unknown, comes by way of sound financing.Something worth not forgetting is that downturns do occur; however with proper preparation, they are going to turn out to be opportunities.
•Emergency Fund: Keeping a cash reserve to fall back on in emergencies will prevent the forced sale of investments at low prices on account of market downturns.
•Long-term Investment Horizon: Invest a portion of your long-term goals, and do not get swayed by the rise and fall of the market in the near term.
•Systematic Rebalancing: It can reduce your risk exposure over time from market fluctuations by periodically realigning, or rebalancing, your investment back to the original asset allocation target.
•Dollar-Cost Averaging: This provides an investment at an average share/unit price lower than what the market fluctuation experience would produce, with the use of a fixed dollar amount taken from waiting to be invested at periodic intervals.
•Know the numbers: how market cycles and investment principles can let you know what to do.
Proper preparation therefore, to the Great Unknown, comes by way of sound financing.Something worth not forgetting is that downturns do occur; however with proper preparation, they are going to turn out to be opportunities.
Be Long Term Oriented: Your Anchor in a Stormy Market
When the stock market is seeing a plunging low, it is very hard to not panic and react. At such times, being orientated in a long-term perspective is the most valuable resource that an individual can have in order to tide over the turbulence. Here's why:
- Understanding the market cycle.
✓Market Fluctuation is the Norm: The very basics that one should know while investing in a stock market are that it is cyclic. Growth will, at any time, be followed by downturns.
✓Time will be on your side: Generally, the stock market has always rebounded after a fall. And the more time you have for money to work it out for you, the more you will ride through ups and downs.
✓Time will be on your side: Generally, the stock market has always rebounded after a fall. And the more time you have for money to work it out for you, the more you will ride through ups and downs.
- Benefits of Long Term Focus
✓Keep emotion out of the equation: At some point, panic selling can only crystallize your losses, more so when markets are down. Keeping your thoughts anchored on the long term reduces the chance of making impulsive short-term decisions.
✓Compounding: Returns can multiply many fold over time due to this effect. The earlier you continue to invest, the more time your money has to grow.
✓Dollar-cost averaging: Over time, investment costs average out to be lower, as it involves not investing at peak levels. This automatically brings down the impact of volatility in a large way.
✓Buying Low: When downturns take place, there may be opportunities to buy quality stocks at an attractive price. This could add value to your portfolio in the long run.
✓Compounding: Returns can multiply many fold over time due to this effect. The earlier you continue to invest, the more time your money has to grow.
✓Dollar-cost averaging: Over time, investment costs average out to be lower, as it involves not investing at peak levels. This automatically brings down the impact of volatility in a large way.
✓Buying Low: When downturns take place, there may be opportunities to buy quality stocks at an attractive price. This could add value to your portfolio in the long run.
- Practical Tips
•Establish a Sound Investment Plan: Create sound, diversified investment programs consistent with investment goals and risk tolerances.
•Periodically Rebalance: review your investment portfolio to ensure you are proceeding toward your investment goals.
•Ignore the Noise: it's best to ignore short-term market 'noise' and maintain focus on the big picture.
•Consult a Professional: If you are really in a dilemma regarding your investment strategy, you can repair it by seeking advice from an expert.
A long-term perspective serves much like an anchor pitched on the sea of tar. It keeps one anchored, away from impulsive decisions, and in a vantage position from which to share in the market's eventual recovery.
•Periodically Rebalance: review your investment portfolio to ensure you are proceeding toward your investment goals.
•Ignore the Noise: it's best to ignore short-term market 'noise' and maintain focus on the big picture.
•Consult a Professional: If you are really in a dilemma regarding your investment strategy, you can repair it by seeking advice from an expert.
A long-term perspective serves much like an anchor pitched on the sea of tar. It keeps one anchored, away from impulsive decisions, and in a vantage position from which to share in the market's eventual recovery.
Avoiding Emotional Decisions in a Down Market
It is human to be afraid, like many other investors act on impulse when the stock exchange is plummeting. It is at such times that mastering the art of staying clear of emotional decisions may help in safeguarding your investment portfolio from huge financial losses. Here's how avoiding emotional decisions can benefit you:
- Emotional Intelligence
✓Fear: Normally, people do panic selling due to fear when the market is trending low. Many investors sell their holdings at losses because they are afraid it can't get better. Included here is a later regret of the decision when the market goes up.
✓Greed: Although quite unlikely in a down market, some investors can be conspired upon by prices that look way too sweet. Finally, buying at the bottom is rather difficult to execute. It requires analysis of ideas, but not borne by impulsive behavior.
✓Greed: Although quite unlikely in a down market, some investors can be conspired upon by prices that look way too sweet. Finally, buying at the bottom is rather difficult to execute. It requires analysis of ideas, but not borne by impulsive behavior.
- Techniques to avoid Emotional decisions
✓Long-Term View: Always keep on top of mind the objectives and investment time horizon. A bear market is just a short-term cycle at play.
✓Diversification: Diversified portfolios reduce the loss made by some sectors or asset classes.
✓Dollar-cost averaging: Investing the same fixed sum of money at regular periods of time, irrespective of the performance of the market at that time. This might go at least some way toward sniffing out the volatility in the market.
✓Education and Research: Be abreast with the market's trends and working of the companies. Information will help you take wise decisions.
✓Emotional Intelligence: Mechanisms to restrain stress and anxiety during downturns can be prepared in advance. Use of professionals can also be encouraged.
✓Diversification: Diversified portfolios reduce the loss made by some sectors or asset classes.
✓Dollar-cost averaging: Investing the same fixed sum of money at regular periods of time, irrespective of the performance of the market at that time. This might go at least some way toward sniffing out the volatility in the market.
✓Education and Research: Be abreast with the market's trends and working of the companies. Information will help you take wise decisions.
✓Emotional Intelligence: Mechanisms to restrain stress and anxiety during downturns can be prepared in advance. Use of professionals can also be encouraged.
- Benefits of Avoiding Emotional Decisions
•Preparation for a market disaster before it comes will stave off panic selling and save your invested capital.
•The down market also occurs as one of the greatest buying opportunities for the long-term investor who is irreversible.
•Make informed choices to help a person lessen personal finance stress.
Note that any investment of any nature poses a measure of risk, and that past performance is no guarantee of future success. Consulting your financial advisor would not go out of place in planning an investment strategy that best fits your financial goals and your risk tolerance.
•The down market also occurs as one of the greatest buying opportunities for the long-term investor who is irreversible.
•Make informed choices to help a person lessen personal finance stress.
Note that any investment of any nature poses a measure of risk, and that past performance is no guarantee of future success. Consulting your financial advisor would not go out of place in planning an investment strategy that best fits your financial goals and your risk tolerance.
Conclusion
The stock market thereby relates to the attitude toward change in economic health and investor psychology; hence, highs and lows are a part of the investment scenario. Emotional courage, strategy making, and long-term vision will have to be furnished on the way to survive in the troughs. Knowing your personal risk tolerance, diversification of your investments, the importance of maintaining your emergency fund, you are better prepared to wait out the downturns and positioned for the upward swings in the future.
Sure, not everybody needs to worry with short-term fluctuations. History tells that the long-term trend has always been one of revival. And all investors, with a disciplined approach and keep arming themselves with the appropriate investment knowledge, must be ready to continue riding out market storms and catch a new rally again.
Sure, not everybody needs to worry with short-term fluctuations. History tells that the long-term trend has always been one of revival. And all investors, with a disciplined approach and keep arming themselves with the appropriate investment knowledge, must be ready to continue riding out market storms and catch a new rally again.
- As the great investor Warren Buffett once said,
"Be fearful when others are greedy, and greedy when others are fearful."
If ever there were words of wisdom that called for counterintuitive advice, it is in these words of the great investor: keep a cool head amidst all the commotion and opportunities when others go panic-stricken.
If ever there were words of wisdom that called for counterintuitive advice, it is in these words of the great investor: keep a cool head amidst all the commotion and opportunities when others go panic-stricken.
