The stock market is a very volatile. Although investors can expect a decent return over time, there are always going to be soft patches. Unfortunately, during a significant market crash, investors can lose substantial chunks of the money they put in. Fortunately, investors can adapt their strategies during a market crash to keep protect their investments.
Keeping Yourself from Panicking
Declining stock prices don’t cost investors money. Investors only lose money when they sell after a drop in price. You need to be careful while you sell stocks during a market correction.
First of all, you need to keep yourself calm. The markets are irrational, largely because people react on emotion. You need to keep a cool head when everyone else starts panicking. The sheep that buy and sell on the market direction are going to lose the most money when markets go down. They will likely sell when stocks have already dropped 20% or more to cut their losses. Don’t be spooked by a little bad news or even a sudden panic.
One of the best courses of action is to not keep track of your portfolio on a daily basis. If you religiously follow your portfolio, you will end up making yourself more nervous. Avoid follow the markets all the time. The last thing you want to do is make an impulsive decision and lose money during a correction.
You should also be careful not to trade frequently. Markets can be very volatile during corrections. Buying and selling increases the likelihood you will lose more money. You will incur large transaction costs which will only hurt you in the long run. As a rule of thumb, hold onto good stocks for the long term. You want to wait out the correction and hold on for a recovery. Trying to time the market makes the situation worse.
Look at Down Markets as an Opportunity
Investors should look at corrections as an opportunity to increase their portfolio. The wisest investors are the ones who buy when everyone else is selling. Investors know they are supposed to buy low and sell high. In practice, they usually do exactly the opposite. Buy your stocks when everyone else is selling. You may not buy at rock bottom, but you will at least be able to buy low.
Lower Your Risk
You also want to adjust your risk profile. This is important because highly volatile stocks will lose more of their value during a recession. When you look at new securities, look at the beta coefficient. Stocks with low beta coefficients may be safer investments when the market starts to drop.
You don’t have to completely abandon stocks during a recession. Markets will always go up and down, so it is probably worth your while to wait it out. Manage your risk and take advantage of the opportunity to buy great stocks at discount. Sound investing strategies will always pay off in the long run.
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