What to do when the market goes down: A simple guide to action
The economy and the stock market are cyclical. This means that a period of growth is always accompanied by a fall, and vice versa. In this article, we’ll talk about how to behave when the market falls, and how not to lose money because of emotions on the stock exchange.
It is important to note that investments always involves risk, because the market is in motion and is constantly changing. And when the market goes up, this is good news for most of investors, but a crush or correction can cause panic not only for beginners.
At the moment, the market situation is conditioned by the new COVID strain. A month ago, a wave of sales in the global stock markets began, which, according to analysts, is considered to be too burning a reaction. Let’s remember the rules that should be followed in such an environment.
1. Determine the goals
You need to choose your strategy in the market. If you prefer long-term investments, you should not worry about market volatility. In the long run, the stock market is always going up. And it just takes time to recover from a recession. During a sharp decline in the market, you must first of all wait,and not revise your portfolio or change your long-term strategy. However, if your goal is short-term investments, for example, for a period of less than three years, then in times of instability it is better to get out of risky assets.
However, situations where you should dispose of an asset are really rare. For example, a company goes bankrupt. In this case, it is necessary to get rid of the shares, and transfer the rest of the funds to another asset. You need to understand that all investors have such moments when the company begins to die, and there are no other options.
2. Build a capital cushion and diversify the portfolio
A balanced investment portfolio should consist of companies assets from different industries. The prices for shares of companies from different industries in the same period of time can change in different directions – some may rise and some may fall.
If we go back to the situation with the Omicron strain, then despite the fact that investors began to extensively get rid of risky assets, the shares of some technology companies that were in demand during lockdowns showed growth. This example just demonstrates how the drawdown of several sectors can be accompanied by the growth of others. Diversifying wisely can make your portfolio less sensitive to declines.
3. Don’t try to overtake the market
Imagine a situation where the market is doomed to fall. Novice investors often think they can act as follows: they mey sell their investmentsand after the inevitable recession occurs and buy them at a more favorable price. However, it is almost impossible to calculate all this and guess the right moment. Even for experienced investors, it is important to remain calm in the market and not sell assets, despite any market fluctuations.
4. Analyze your assets in the portfolio
After any market drop, your portfolio will inevitably lose relevance. If analysts predict the onset of a bear market, it is necessary to learn how to analyze the portfolio and reduce the share of risky and increase the share of stable companies. In situations of instability, it is necessary to focus on the largest companies in their industries, which will definitely survive the crisis, and invest in “defensive assets”. Defensive assets are securities that move slower or against the market. That is, these are the most stable financial instruments, the value of which remains unchanged even in times of crisis. Traditionally, defensive ones include currency, deposits, bonds and gold, as well as shares in some industries, such as the electric power industry. Defensive industries need to be studied by itself. You can also pay attention to stocks that bring dividends.
What strategies can be used to protect your funds?
- For those who like risk, they can take advantage of the moment and find undervalued companies. For example, companies from the alternative energy industry.
- For those who are not ready to take risks, but want to continue to be active in the market index funds can be preferred. This is the possibility of diversification and protection against large losses. You can learn more about ETFs in a previous article on our blog. They will allow you to diversify your portfolio and protect yourself from large losses. It is especially profitable to buy them on drawdowns.
- For those who want just to stay calm, they can put up with the fact that there is no escape from the market drawdown, and in this case, stop reading the news all the time and go into information isolation for a while.
During a downturn, it is important not to start selling all your stocks sharp. The market will recover in any case. We recommend watching the chart of the S&P 500 in times of crisis. It has been growing for the last 50 years, growing now and will continue to grow. Any corrections are temporary, that you can wait out.
In investing in the long term MonInvAI can help you, which predicts the value of stocks and cryptocurrencies. The platform is an example of the use of both technical analysis and fundamental, and on their basis the introduction of artificial intelligence.
