Investing isn’t for the faint-hearted and as an investor, it’s important to accept that there’ll be bumps along the way. There’s no denying it, seeing the value of your investments fluctuate can be stressful, but it’s part and parcel of investing in stock markets. Here are some things worth considering when markets hit new lows.
Why it’s not a good idea to sell your investments when markets are falling
When stock markets fall, many investors will panic and sell investments that have lost value in order to avoid further losses. It’s a natural reaction. After all, nobody likes losing well-earned money. But in the world of investing, it’s never a good idea to listen to your emotions. In fact, letting your emotions take over and dictate your investment decisions could hurt your investing journey. Think about it. You’re only making a loss when you sell your investments at a lower price than you bought them. If you don’t sell, keep your nerve, and remain invested, the loss remains hypothetical and there’s still a chance your investments could see their value bounce back if markets recover. Take the financial crisis of 2008 for example. As global markets crashed, many investors lost money, but some people managed to navigate the troubled waters by keeping a cool head. According to a study led by Fidelity, people, who invested in funds in 2007 and held onto their investments during and after the crisis, are now on average more than £30,000 richer than those who jumped ship hastily1.
What to do when financial markets drop?
As soon as markets fall, it’s important to remain calm and try and resist the urge of reacting to the drop. It might sound a bit counter-intuitive but doing nothing and staying invested for a number of years, regardless of market movements, could help you ride out the bumps. But that’s not all! Ignoring market sneezes and staying invested over the long-term could help maximise the potential growth of your investments. Many studies have found that long-term investing tends to increase the likelihood of making a positive return. For instance, investors who held onto their investments for any 10-year period, between 1986 and August 2019, have had an 89% chance of making a gain2 – and this time period comprised many important crashes, like Black Monday, the Dot-com bubble, and the Global Financial Crisis of 2008.
Keeping your nerve and focusing on the long-term are key to smooth out the ups and downs in your investment plan, but they’re not the only things you can do when markets drop. This might come as a surprise to you, but falling markets aren’t always bad news and there are ways to take advantage of the situation How so, you ask? Well, falling markets typically mean that investments are becoming cheaper to buy. In other words, market drops give you the opportunity to purchase cheap investments that could potentially generate a good return later on if things get better. One way that could help smooth out market bumps is to consider investing little and often without paying attention to market fluctuations. That way, your plan gets fed regularly and you're less exposed to short-term fluctuations. In other words, by investing regularly, you have the possibility to grab cheap investments that could potentially increase in value if the markets go back up.
2: Data from Bloomberg
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.