How to deal with a market downturn?

How to deal with a market downturn?

As we continue to deal with an uncertain market, we offer some advice on how to deal with a downturn so you can come out of it a better investor. 

Any investor knows that market downturns are inevitable. Those of you who are fortunate enough to have never had the experience of looking at your portfolio only to be greeted by a sea of red will inevitably be confronted by them. The way you respond is often what separates the successful investors from the rest. 

Given the extreme volatility the markets are currently experiencing, it’s easy to become anxious. So here’s some advice on how to manage a severe downturn and come out of it healthy. 

Don’t panic, don’t sell, don’t do anything 

The first and most important piece of advice isn’t to panic. As the numerous previous stock market crashes have shown, the market will eventually recover. If you panic and start selling, you could be depriving yourself of potential long-term gains. 

When you exit your positions, you’re locking in a loss, even though it’s statistically likely that the market will recover. The hardest thing to do in troubled times is to do nothing, but if you hone that temperament, you can put yourself in the best possible position to eventually outperform the market 

Collect your thoughts 

Once you’ve avoided the inevitable feelings of panic that come with a fluctuating portfolio, it’s time to gather your thoughts. In particular, think about your investment timeline and reevaluate your current positions. 

Short-term thinking can be extremely dangerous for any portfolio. By reminding yourself of your own time horizon, you can regain clarity. With a 20-year perspective, any earnings report is only representative of 1.25% of the time you plan to own a stock. Great companies won’t collapse because of one bad earnings report, so remember to think outside the box and think long-term. 

Remember the reasons you already hold the stocks in your portfolio. If the underlying facts of these companies haven’t changed, neither should your beliefs. Companies will always rise and fall in the short term. The successful investors will ride out this turmoil and still own a successful company on the other end. 

Go on the defensive 

Now that you’re no longer panicking and your thoughts are focused, you can take action. First, review your portfolio for diversity. If possible, diversify in several ways: geographically, stylistically, and across different industries. This way, you’ll protect your portfolio by making sure you’re not overly affected by any one issue. 

Next, consider rotating into defensive stocks. Certain industries tend to do well in an economic downturn, such as utilities or health care. Owning stocks in these industries that perform well can help cushion general market problems. 

Go on the offensive 

Once your portfolio is sufficiently hedged against another downturn, you can consider some purchases if the situation allows. By making calculated moves, you can secure valuable stocks at a discount. Many investors turn away from high-growth stocks during a downturn out of fear. If the underlying characteristics of these companies are still strong, you may be able to invest while they’re undervalued. 

A strategy like dollar-cost averaging could be of particular use here to take some of the emotion out of your purchases. 

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