Volatility in the markets can cause some people to feel uneasy and maybe even sell their investments in the fear that a bigger economic downturn is coming. When the markets go down some people panic and do things they normally wouldn’t do. This can lead to losses, decreased returns and increased stress.
Here are some basic tips I have learnt on how to survive (and occasionally profit from) a market meltdown.
Avoid Emotional Decisions
When the markets suffer a huge loss it is only natural to begin to worry about your investments. Whether you are buying or selling in a downturn, it is important to focus on market fundamentals rather than acting solely on emotions. Personally I find it best to look at the numbers before doing anything with my investments in a downturn.
If I feel that a certain stock is undervalued and will go up over time, I will likely buy after analyzing the stock. I try to stay away from making rash decisions in the heat of the moment without any solid analysis done beforehand.
Have a Plan
Whether the markets are up or down, it’s always important to have a plan for your investments. Before buying it’s important to consider market timing and what your plans are for the next 1-3 years and beyond.
If you will not need the cash in the next 5 years, perhaps it makes more sense to take more risk than someone who will need the cash in the next 3-5 years. When you have a plan, you’ll be better able to make decisions on what to do with your investments when a downturn hits.
I’m pretty far from retirement but I prefer to invest in stocks that pay dividends. No one knows where the market is headed in the future but I like to be paid while waiting (in the form of cash dividends). Steady passive income from my investments is a long term goal of mine, so I usually use a downturn in the markets to buy more stocks if they are undervalued.
Buying in a downturn takes guts, but I have found it can decrease my cost base and increase potential capital gains if/when the stock rebounds.
Think Long Term
Another important aspect of surviving a downturn in the markets is to think long term.
Short term thinking can lead to bad decisions (selling) based mainly on emotion (fear). You only incur a loss when you sell – in a downturn it is likely better to hang on to your investments and ride it out (if possible).
In the past 3 years, when the TSE has dropped more than 2% in one day it has taken less than 13 days for the losses to be recovered. While the losses for one day may be steep, over time the markets have recovered from temporary downturns.
Conclusion: while it’s important to pay close attention to the performance of your investments, it’s also important to avoid making emotional decisions in a market downturn. Make investment decisions based on your own analysis and on market fundamentals, think long term when investing and have a long term plan in place so that you can take advantage of undervalued stocks when a market correction occurs.