What not to do when a market downturn occurs
The stock market is volatile and it is difficult to predict its future behavior. Even the most optimistic investor should understand that the index chart is never a straight line pointing up. Strong growth could be followed by a strong fall.
There is no ideal formula that speaks about how to act in a long-term decline. But there are decisions that a reasonable investor needs to remember and not make these mistakes when a market downturn occurs..
1. Sell everything
There is no reason to sell shares and convert them into cash, if before buying the assets you estimated the real value of the companies, studied the financial statements for several years and protected the portfolio with bonds.
Like the economies of individual countries, markets are also cyclical. According to Guggenheim Partners, since 1945, the S index&P500 78 times decreased by 5-10%, but on average, it took only one month to return to its previous level.
Consider the purchase of securities as the purchase of a share of a business. Is $ 270 a share in Netflix – is it a lot or a little? And 185 rubles per share of Sberbank? To answer this question, the investor must understand the effectiveness of the company. Netflix financials show that at this point, their business will pay off only after 90 years. Stocks are clearly overvalued. If you buy Netflix securities, then be prepared that they will lose much in price when the market dips..
When an investor diversifies a portfolio and does not buy stocks revalued by the market, he remains calm because he is confident in his personal strategy.
2. Panic
Reasonable investment decisions are based on rational considerations, not emotions. Panic contributes to unsuccessful actions. Of course, when prices break down, it’s hard to maintain composure. But for the implementation of long-term financial plans, it is important that the investor remains adamant. A small drawdown in a good diversified portfolio should not be terrifying. Fear of a falling market is a sign that a person is not fit for investment.
3. Do too much
Market decline – the opportunity to buy shares of well-known companies at a bargain price. This is a good entry point and there is nothing wrong with slightly adjusting your portfolio and purchasing securities from McDonalds, Microsoft or Procter.&Gamble But do not reinvent the wheel and buy everything.
It will be difficult for extremely active investors during this period to remain calm. The correct strategy for long-term investments suggests that you need to rush less from side to side. If the investment plan is designed for at least two years, a recession is a small bump in a long way.
4. Being obsessed with the market
Now investors have the opportunity to monitor the status of securities 24 hours a day, and some do. But during recessions, such a passion negatively affects the emotional state. In addition, the daily flow of negative news affects confidence in the strategy and leads to errors.
Jamie Cox, managing partner at Harris Financial Group, draws an analogy for this case: “No one drives up to your house every day and declares its value. Even if this were to happen, you would hardly sell housing every month. Take stocks calmly. Keep them for saving money and generating income in the future. ”.
5. Catch the “falling knife”
An attempt to earn more by “feeling for the bottom” of the stock price chart is called “catching a falling knife.” Replenishing the portfolio with good assets whose price has declined under the pressure of a bearish trend is a profitable solution. But the fact that they have fallen in price does not speak about their high potential.
Some people manage to catch a knife and thereby show a beautiful trick. But most of those who try to repeat it fail. An investor should not buy a security just because its value has become lower. Remember, you first need to evaluate the effectiveness of the company’s business, then look at the value of the stock and only then make a deal.
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What are the possible consequences and risks involved in selling everything one owns? What are some strategies or alternatives to consider before making such a drastic decision?
Selling everything one owns can have serious consequences and risks. One obvious risk is the potential loss of personal belongings and sentimental items. Financially, selling all possessions may not yield enough profit to cover debts or future expenses, leading to financial instability. Furthermore, one may face challenges re-establishing a living situation without any belongings.
Before making such a drastic decision, it’s important to consider alternatives. One option is downsizing possessions gradually, selling only what is necessary to cover immediate expenses. Another strategy is seeking financial guidance or counseling to explore other solutions, such as debt consolidation or budgeting assistance. It’s also crucial to consider how selling everything aligns with long-term goals and objectives. Consulting with family and friends or seeking professional advice can provide valuable insights and perspective before making such a life-altering decision.