Investing when the markets are down can take a little bit more resolve than when prices are steadily rising. But although it might feel like you’re taking a bigger risk, in reality, it hasn’t really changed. After all, when you invest, your money can go down as well as up depending on how the markets are performing.
So, what do you do when a market drop happens? The reason we say ‘when’ is because, statistically, if you’re investing for any period of time, sooner or later you’ll encounter a dip (which is when the value of your investments fall). And when that happens, chances are, you’ll want to be prepared for it.
Here are ten steps that could help you to take any market crashes, corrections, dips, or whatever else you want to call them, in your stride.
How to survive a stock market drop
Investing in a drop is slightly different to investing during a bear market (a bear market is investment speak for when a market index drops 20% or more from its peak, and this often happens over a longer period).
Stock prices can drop for lots of different reasons, and they might only affect a certain industry or certain asset types, like stocks and bonds, or they could affect the economy as a whole.
There are plenty of unwritten rules on how to deal with your money losing value. But the first (and arguably most important) rule of investing when the markets are down is to not make any rash decisions.
So, here are some things you might want to consider:
#1 Don’t act emotionally
Whether it’s a crash, a correction, or a bear market, seeing the value of your investment account fall can strike fear into the heart of even the most experience investor. Market dips aren’t a time for emotional thinking, as fear can lead you to make quick decisions to buy or sell your investments – and if you sell when prices fall, then you could be making those losses real instead of giving the market time to potentially recover.
#2 Don’t try to time the market
One way to make money by investing is to buy stock at a low price and sell it when the price is high. This is because the lower you buy and the higher you sell, the greater your potential profits could be.
However, if you’re waiting for the market to reach the bottom, the chances are that you’ll miss it.
#3 Use pound cost averaging
If you do want to try and take advantage of lower prices during a market dip, why not consider pound cost averaging (or ‘dollar cost averaging' if you’re from the states)? Instead of trying to time the market, you’ll buy little amounts of investments often.
This could help you take advantage of lower prices, and it literally averages out the price you pay over time. And the benefit of this is that it may help to smooth out any drops in market performance.
#4 Accept your risk level
At some point, you chose the level of risk that you accepted with your investments, whether that was with your own decisions when choosing the asset allocation for your portfolio, or deciding on an investment risk level with a managed portfolio, as you do with Wealthify.
Investment journeys are rarely straightforward, so it’s important to ensure that you’re comfortable with the level of risk you’ve chosen (though you can change the one you’ve picked at any time with Wealthify).
#5 Think about your goals
Are you saving for something in particular? Perhaps it’s a retirement account, or you were investing to help buy your dream home in the future? Whatever that goal is, it’s a good idea to keep it in mind when the markets start to fall.
Keeping your long-term goals in mind and remembering that it is a marathon, not a sprint can help you to keep your eyes on the prize and settle the nerves when bear markets occur.
#6 Take on more ‘safe’ investments
If you want to keep on saving, but you’re worried about increasing the level of risk you’re taking on, then it could be worth looking at increasing your holdings in so-called ‘safe’ investments like bonds or commodities.
These are typically less turbulent than shares and could help to soften the impact of volatility on your portfolio.
#7 Think long-term
The best results from investing normally come from taking a long-term approach. This means that you should be thinking in terms of years and decades, rather than days or months.
It may sound like a long-time, but patience can really pay off in this case. For example, Bloomberg data shows that if you invested in the FTSE 100 for any 10-year period between 1986 and 2022, you would have had an 88% chance of making a gain.
#8 Read, read, read
‘Knowledge is power’ is a bit of a cliché but knowing what’s happening during a market downturn can help put your mind at ease too.
So, check-in on global news stories, see what you can find out about the companies or industries you’re invested in, and keep an eye on what professional investors are saying. Not only will this help to keep you informed, but you could find ways to take advantage of the market downturn as well.
#9 Keep on investing
If you can afford to, it could pay off to carry on investing. This way you’re not constantly watching your money fall or being faced with the challenge of whether to sell a stock or not.
Instead, you could simply choose to invest whatever you can afford and buy shares at lower values than you normally would – doing this could actually give your portfolio greater potential for growth in the future.
#10 Don’t do anything
In reality, if you only follow one point on this list, then this one could be the best. Which is: Ignore everything, and let the markets run their course.
There’s an urban legend in investing that Fidelity did a study and found that their best-performing investors between 2003 and 2013 were dead. The source for this can’t be found, but it’s referenced A LOT! And even if it isn’t strictly true, the idea behind it is sound – doing nothing eliminates emotion from the process and allows you to focus on long term performance instead. So, if you are able to, sit back and let the markets do their thing, then you could be better off in the long run.
#11 Bonus tip: Get ready to do it all again
Whether you like it or not, market downfalls are just another part of investing. Not only do you need to be comfortable with that fact, but it could also be worth making sure that your portfolio is set up with falls in mind.
Taking on greater risk during a bull market (when the prices are going up) may feel more exciting, but it could end up coming back to bite you if you aren’t comfortable seeing that money fall during a dip. After all, risk works both ways – bigger opportunities for gains can also mean bigger opportunities for loss.
Hopefully, this has given you an idea of some of the ways you could reduce the impact of a market drop. But if you still aren’t sure about investing, then you may want to speak to a financial advisor about your options as they can provide you with personalised financial advice to help you get the most from your money.
Alternatively, if you want your investments looked after by a team of experts, why not try Wealthify?
We have five levels of risk to choose from with our Plans, letting you pick an investment style that you’re comfortable with – and you can even opt for Ethical investments to stay true to your values by only putting your money in companies that are having a positive impact.
Our team will then do all the hard work, such as buying and selling investments for you and keeping an eye on how the markets perform, helping to offer a little peace of mind that your money is in good hands.
Inspiration taken from The Motley Fool: https://www.fool.com/investing/2021/05/18/your-stock-market-crash-checklist-10-things-to-do/
Please remember that past performance is not a reliable indicator of your future results.
With investing your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
Wealthify does not offer advice, if you’re not sure whether investing is right for you, then please speak to a financial adviser.