How to Handle a Market Downturn

If you’re an investor already or have been looking to get into investing lately, you’ll probably agree that his topic has become rather fitting recently. In fact, the current market situation even draws comparisons with the Great Recession of 2008. That’s how you know it’s serious.

Nevertheless, a market downturn is definitely upon us. While it doesn’t necessarily mean an impending market crash, the decline in the stock market has the capability to hurt both the aware and unaware. However, if you come prepared, there’s reason to believe your portfolio will be just fine, if not better.

What you shouldn’t do

If the day has come that every major headline reads doom and gloom in the world of finance and investing, you’ll find yourself feeling at least a bit uncertain about your options. Naturally, had you prepared for such an occasion beforehand, this feeling of uncertainty would soon wane. On the other hand, if your approach to investing has never been overly serious, chances are that you’re in for a ride. Not the fun one, either.

Do not fret, though!

That’s right. The first thing you shouldn’t do is panic. As a species we tend to fear the unknown, and, as previously mentioned, when you’re unprepared, fear can play a significant role in your further actions. That is the exact thing you want to avoid. In fact, that is what everyone should try to avoid as much as possible, since panic (selling) is one of the major reasons behind market crashes.

Do not sell!

There’s this moment when you watch your assets taking a plunge and your hard-earned money going down the drain that just makes the hair on your neck stand up. All you’ll want to do is sell! Sell immediately, without thinking. That, however, might be the worst course of action to take. Once you sell the asset, the price is set. Meaning – if you sell for less than you bought in for, you will lock in your losses. While initially that may seem like a method to avert a complete annihilation of your portfolio, it’s still a guaranteed loss. Whereas, if you didn’t sell, the market could eventually settle and recover. And past data shows that the market always recovers.

What you should do

Come prepared.

Seriously. Even before starting to invest. Know your ‘ABCs’. Research the asset class that interests you. Find out which assets would correlate with others in case of a market downturn or crash. You don’t have to be an investing genius, but knowing the basics can help you avoid some of the eventual stress that market volatility may incur.

You can also try to assess your risk tolerance. While you will eventually find it, anyway, knowing your limit in advance can come in handy. As your risk tolerance guides your investment choices, it is more likely that you will be more prepared for what’s to come in case of a market downturn.

Diversify.

Technically, this belongs together with being prepared. By diversifying your investments, you can ensure that your portfolio will take less of a hit in case of market downturn. Maybe even go up in value. While a market downturn and more so – a market crash can take down most stocks, various industries may still thrive. By diversifying your portfolio, you can then potentially even out the effect of a market downturn.

Index funds and ETFs are an affordable means of diversifying that you should definitely look into. You can also diversify by purchasing individual assets across your asset class, however that comes at a much higher price. Not everyone can afford this method.

Take care of both your short-term and long-term interests.

Instead of fearing the market dip, see it for what it really is. An opportunity. Whenever stocks go down in value, they do not only diminish your portfolio, they also become more affordable to every investor, including you. So, your short-term interest should be buying the dip. If you don’t feel like putting a lot of money into an asset that’s been on a downward trend, dollar cost averaging should be your approach. Considering the market will eventually recover, by dollar cost averaging yourself to additional stock, you make certain that you will profit from the current state of the market. DCA also relieves you from trying to time the market, which, ironically, is time-consuming and leads to additional stress.

Understanding that your long-term interests are actually being taken care of by your short-term interests will help you avoid panic and emotion-driven decisions.

In conclusion

Psychology and timing are no doubt a great part of being successful. It goes for all endeavours, including investing. Not everyone possesses the same talents or skills, though. Where one man succeeds, others tremble in fear. And vice versa.

However, you can prepare yourself up to the point where various factors have limited impact upon your decisions and actions. First, you should understand what exactly it is that you’re investing in. Second, try to gauge your risk tolerance. Then, you should, as a rule of thumb, follow a certain investment strategy. This will help you avoid mistakes that may seem like good short-term decisions but could actually lead to long-term losses.

Of course, the times – ‘they are a changin’. And your preparations may need to be adjusted over time. But, as long as you understand that you should take your portfolio seriously in order to have successful and bountiful investments, you will do what it takes to learn and adjust.

Like with anything else that’s worth doing, knowing when to seize an opportunity is immensely important. Putting all of your money in one asset on a downward trend can be scary. That’s why using a method like dollar cost averaging can grant you a sense of calm, while still offering a chance at profit down the road.