Waiting Out a Stock Down Turn
Stock investing is tricky business, and market downturns can be extremely stressful if you don’t have a plan in place in how to deal with them. It is only natural that when you see your investments losing value, your first reaction will be to take your money and run far, far away. The problem, of course, is that selling shares and stocks in a panic is never a smart move when you consider the old adage: buy low, sell high. When you sell your stocks or mutual funds after a market drop, you are doing just the opposite.
To avoid that panicky feeling, it is best that you take steps to prepare for the downturn before it happens by investing in such a way that gives you confidence even if the stock market is taking a nosedive. So how does one actually do this? The following are a few tips for taking the emotion out of investing, and replacing it with strategy.
Reserve Some Cash
First and foremost, you know yourself. If you know that watching the market plunge is going to give you chest pains, then you can help yourself out by reserving some solid assets that will provide you with financial stability should the whole investment thing fail. Having something to fall back on is also helpful for those long weeks that you will eventually have to spend waiting out an economic downturn.
Find Your Risk Tolerance
How much you are willing to lose will be vastly different from other people, either because you can stomach different levels of stress or because you have varying amounts of capital to fall back on. Either way, some are willing to risk potential losses if the potential gains are worthwhile. Additionally, if you are a young person you are in a better position to take on more risk, as you have time to make up for any losses.
Make Your Plan
You need to decide how you will react if a market crash situation were to arise. By having a solid plan in place you can avoid making snap decisions that you may regret later. Serious investors create an investment policy statement, which is basically a financial roadmap with guidelines that they and their financial investors will follow in case of an emergency. With a plan like that in place, you can take the emotion out of investing whether the markets are abnormally high or abnormally low.
Be Systematic and Predictable
Once you have decided on your risk tolerance and have a solid personal investment policy in place, you can begin by investing in a systematic manner. You might use the dollar-cost averaging strategy, or even the dividend reinvestment plan. If you have a system in place and you stick to it, you won’t panic when the stock market stumbles.
Don’t Buy Into the Backward Hype
It is only natural to feel happy when the stock market rises and sad when it plunges, but is this a backward way of looking at the situation? If you plan on being a net saver during the next few years, should you get your hopes up for a higher or lower stock market during that period? In effect, many people get happy when they see the stock market rising, but this is only good news if you’re planning to sell right away. Prospective purchasers, on the other hand, prefer to see sinking prices.