The Market Is Falling, What Should I Do?
It’s easy to brag about how great you are as a stock trader when the market is going up but when the market is diving, panic is not uncommon. For newbie investors who have not yet experienced a market crisis, what is happening today might bring great fear and uncertainty. Things are suddenly much more interesting after years of hearing about record after record highs being broken.
This market correction only shows us that bull markets don’t last forever. The possibility of losing money suddenly seems very real. During times like this, inexperienced investors will be wondering what to do.
I won’t give you the technicalities of handling a portfolio during a market correction but instead I will help you understand how important it is to be very keen on your fundamental behavior in all market conditions. Here are a few things that investors should do when the market is falling and learn how to invest your money safely.
Take a deep breath and don’t act impulsively. It might be difficult to see your account summary all written in red font but if you are properly diversified, you shouldn’t fret about market fluctuation. Instead of selling all your holdings, it’s will be good idea to revisit your investment plan. If you don’t have one, now is the best time to have a written plan on how to manage your hard-earned money.
You can also review or even rebalance your portfolio. When the market is up, it is ideal that you rebalance your investment allocation. If the worth of the equity position is way bigger than your fixed income investment, then it is ideal to sell the top performers and reallocate it to fixed income to maintain your portfolio balance according to your risk profile. The same thing is true during a market sell-off — you can commit new cash to the underweight areas of your portfolio.
If you are investing for your retirement, turn off your TV and ignore the social media notifications telling you how bloody the market is right now. Reacting to every market movement might not give you a very good retirement fund in the future. Since retirement investment is a long-term haul, reacting to a normal correction might result in a higher transaction fee in the long run. As long as you are invested appropriately for your goals, you can stay away from your investment portfolio.
Be careful in buying more stocks to bring down your average buying price. It’s a good opportunity to buy during the correction but buying more just to cover your losses without checking why the price is falling could be a dangerous game to play. It’s good to buy low-priced stocks that are fundamentally strong — if you do that, the upside of the investment will be much higher. But when the company is deteriorating because it was greatly affected by an economic decline, then averaging is like catching a falling knife.
It’s also good practice to have plenty of cash in your account. Cash is also a position in addition to “buy” and “sell.
Cash may not gain anything but it does lower your risk and allows you to buy more when the stock market dips.
Another good thing to do when the market is falling is to pay more on your mortgage. If you are the type of person who is diversifying by having not just paper investments but also real estate investments and are using bank financing to acquire assets, then it is your chance to minimize your overall return on your wealth. During the market decline, it may be difficult to gain even three or four percent in your paper investment. So why not allot more money to pay off more debt? By doing so, you reduce your principal loan amount, which will result in a lower interest rate. It doesn’t matter whether the real estate market is up or down — your interest obligation to the bank will remain.
There is no way to know for sure what will happen to our economy or the stock market. One thing is for sure: both seasoned and inexperienced investors will be affected. But those who will be greatly affected are those people who don’t fully understand not the market but themselves. As Dave Ramcy always said, “personal finance is 80 percent behavior and 20 percent head knowledge.”
Christopher G. Cervantes is a registered financial planner of RFP Philippines. He is author of Financial Planning for the Fast Changing World and The Seed Money. To learn more about personal/financial planning, attend the 68th RFP program this May. To inquire, email firstname.lastname@example.org or text <name><email><RFP> to 0917-9689774.
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