“Bull markets are built on the shoulders of bear markets.”
What do you do when there is a downturn in the stock market? This is a question investors and immigrant entrepreneurs have been asking more frequently lately.
With some stock prices dropping by over 20% and other RRSP retirement portfolios also shrunk, many investors are feeling nervous. Here are 7 top tips that can help you weather a prolonged downturn in the stock market.
- Avoid knee-jerk reactions and do NOT panic
When the market drops, it can be tempting to jump out until asset values begin climbing up again. But that can lead to costly mistakes. By selling when the market has fallen steeply, you’re at risk of locking in a permanent loss of capital.
To optimize one’s potential over the long term, what’s crucial is time in the market, not market timing,
- Remember history and prosperity
History confirms that the market always bounces back. The average S&P 500 bull market is 178% and lasts 60 months. This is over four times larger and longer than the average bear market drops of -38% over 19 months.
So, history tells us that the markets reward investors who dig their heels in and ride out the tough times.
If you sit on the sidelines when markets become volatile, you could miss major rallies, which often occur during the early stages of a recovery, over a limited number of days.”
- Revisit your goals and risk tolerance
During a bull market, it’s easy to forget how uncomfortable it can be when your assets decline in value—especially assets that you’re counting on to fulfill a relatively short-term goal. If you’re retiring in a few years, it could be wise to think about dialing back risk, even if it feels as if you’re doing it after the fact.
Investors with longer time horizons could typically withstand market volatility. But if you need to tap investments sooner, you might consider a more conservative asset allocation.
- Rebalance your portfolio
Over the course of a long bull market, your stocks can appreciate or depreciate more quickly than your cash holdings, throwing your portfolio out of alignment. Consider this an opportunity to address any imbalances that may have occurred.
- Keep investing consistently
By investing a fixed amount of money at regular intervals regardless of market conditions, you’re more likely to be able to purchase equities at more affordable prices, and potentially see the shares rise in value once the market rebounds.
Making regular weekly or monthly contributions to your portfolio—a strategy called dollar-cost averaging—is a form of systematic investing that potentially can offer efficiency when the market has fallen.
6. Look for opportunities across different markets
Despite the sharp sell-off, there are always places to hide. Commodities are up 30% this year, oil prices have surged by over 50% the USD index is up 10% and high dividend yield stocks near 10%.
In a market downturn, defensive stocks—consumer staples, healthcare and utilities, as well as companies with higher-quality businesses and balance sheets—potentially can also offer opportunities.
- Maintain perspective and buy the dip
No matter how deep or long the downturn ends up being, in the past markets have bounced back. “Bear markets have been seen before, and anyone looking at the historical price charts can see that those markets have recovered to grow higher than before.
Investors who remain disciplined in a negative market are likely to avoid common pitfalls and potentially enjoy better times ahead.
For example, at the start of the market downturn this year, Apple share price fell to a record low of $130. In less than two months, Apple has climbed to nearly $170.
The same goes for Tesla which now stands at almost $1000 from the earlier “crash price” of around $660. If you had invested $10,000 in Apple or Tesla two months ago, you would have gained an extra $3000.
Historically, the longer you stay invested, the greater your possibility of meeting your long-term goals. Other smart investors who have the liver to buy the dip when stock prices fall, also reap huge rewards.