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Market downturns, corrections and bear markets are inevitable parts of investing. Though they can be unnerving at first, their effects tend to be short-lived without detrimental long-term returns.
Informing clients of the nature of fluctuations can help them remain calm and focused on their goals during a downturn. A few tips to remember may include:
1. Don’t Overreact
Steep market declines are an inevitable part of investing, and can even shock veteran investors. It’s important not to overreact – reacting too hastily could result in selling at the wrong time and compound losses further. Instead, investors should remain patient and follow their investment plan over the long haul.
Sharing historical data with clients to illustrate that downturns are inevitable can help keep their nerves calm. Furthermore, discussing risk tolerance and conducting hypothetical performance calculations before investing can assist them in staying grounded.
Shrewd investors should take note that taking advantage of market dips by buying shares on sale could prove profitable in times of market instability. Dollar cost averaging investors could benefit from buying more at reduced costs during downturns; by setting goals and being reminded about them regularly, financial plans help provide the confidence to stick with them and maintain focus when fearful voices threaten your plans.
2. Don’t Sell
Many investors make one of the worst investing errors: selling during market downturns. Though it can seem tempting when prices decline, selling during these moments only makes temporary losses permanent.
Downturns, corrections and bear markets are an inevitable part of investing. The sooner you accept this reality, the better decisions you’ll be able to make.
As markets experience downturns, keeping your current investment accounts open can prove advantageous over the long-term by taking advantage of dollar-cost averaging. By depositing the same amount into your account on a regular basis irrespective of price fluctuations, you’ll be able to buy more shares when prices decline and reap the rewards from their rebound when prices recover. Furthermore, by maintaining holding periods that meet eligibility requirements you may qualify for lower taxation on dividends you receive; which could prove especially useful for shorter investment horizons.
3. Stay the Course
An economic downturn provides the perfect opportunity to review your portfolio and ensure it aligns with your financial goals. Remember, investing is meant to meet financial objectives; therefore a temporary setback shouldn’t change that process.
Even if it may be tempting, selling during a market downturn could prove costly. Selling at such times means locking in losses and forgoing any potential opportunities of price increases in the future. Over the last 73 years there have been 13 bear markets (declines of at least 20%) and 14 bull markets (rises of at least 20%).
Timing the market can be tricky, yet studies show that those who sold during market downturns were more likely to miss out on larger gains when they reentered the market after selling during these moments. Instead of selling during a downturn, consider rebalancing instead to maintain your targeted allocation and stay consistent.
4. Keep Your Goals in Mind
No matter if you are an experienced investor or just starting out, volatile markets can be unnerving for investors of all experience levels. But it is crucial that when markets turn against you that you remember your long-term financial goals and keep these in mind while managing daily trades.
As part of any effective investment plan, it is critical that you understand your risk tolerance – how much volatility you are comfortable with in exchange for higher potential returns. A financial advisor can assess this through answering a series of questions; alternatively you can take this assessment yourself with online questionnaires such as SmartAsset’s.
Keep in mind that markets may remain down for some time before rebounding, and selling investments during a market decline could mean selling them at low prices and missing out on future market upswings. Therefore, dollar cost averaging is often preferable and should be employed.
