In this article, we will delve into the challenges and emotions that come with a down market. Every investor is bound to face a market downturn at some point, so it’s essential to prepare and mitigate unwanted outcomes.
For long-term investors, the key is to spend most of your time doing anything but trading. The answer may seem straightforward, but as with most things in life, it depends on the situation.
Imagine waking up in the morning and discovering that every position in your portfolio is significantly down. It’s not exactly the feeling we look forward to—it can trigger worry and even make us question our entire investment strategy.
During such moments, it helps to refresh your understanding of long-term market trends to ensure that every decision or action you take is informed.
General Statistics
Down markets are more common than you might think. The stock market has weathered various events in the past, such as the 2008 financial crisis or the recent COVID-19 pandemic, along with other recessions and depressions. Reflecting on these events once they’re over can provide a better perspective.
Let’s visualize the frequency of down markets:
- A 10% downturn occurs approximately every 11 months.
- A 15% downturn happens roughly every 2 years.
- A 20% downturn occurs about every 4 years.
- A 30% downturn arises roughly every 10 years.
- A 40% downturn arises every few decades.
- A 50% downturn occurs 2-3 times per century.
So, the next time you find yourself in a down market, keep these facts in mind to prevent overreacting. Not every market downturn is as extraordinary or long-lasting as it may initially appear. On average, recessions last 18-22 months, while economic growth periods last 36-38 months.
Down Markets Are Not Permanent
As much as you might fear a down market, it’s important to recognize that it is usually not a permanent state. Therefore, be patient and divert your attention to other aspects of life or spend more time researching the companies you are invested in.
Avoid Premature Selling
Selling in a down market is the last thing you want to do. Remember: Gains and losses are only realized when you sell. Technically, you haven’t lost anything if you don’t sell your shares. Your objective is to maximize your gains, so a down market should not trigger your inclination to sell.
Furthermore, since a down market typically affects the entire market, there is likely no company-specific news that challenges your investment thesis. Therefore, selling would not be warranted in any case.
Challenge Your Instincts
To prevent panic-induced selling in down markets, some investors need to challenge their natural instincts. Focus on other activities that bring you joy, such as going for a hike or embarking on a bike tour. Engaging in activities that make you happy can help counteract your instincts.
Always keep your long-term investment goals in mind. Remind yourself that you are in it for the long haul.
Ensure You Can Weather High Volatility
Down markets usually coincide with high market volatility. This is understandable, as many people sell out of fear, which destabilizes the market. As a result, automated investment programs are triggered, leading to a downward spiral.
Investors who diversify their portfolios effectively to spread overall risk tend to experience less volatility during down markets.
Ask yourself: Would you be able to handle your portfolio losing 50% overnight? If the answer is no, it might be better to invest some or all of your money in indices or ETFs. Investments in individual companies are generally more volatile.
If Anything, a Down Market Presents Opportunities
When prices are down, it’s time to consider buying, right? Down markets offer opportunities to enter the market at an advantageous time. Prices will eventually rise again; it’s just the nature of the market. A down market does not mean that the companies are now worthless.
With this mindset, we can transform something negative into a positive event.
Being a long-term investor requires constantly battling fears and instincts. Some investors may have fewer instincts to worry about, while others may have more. Remembering this fact and developing habits that act as a safety net will allow you to shape your financial future. StockFit, with its Analysis Framework, is here to assist you.
Regardless of your level of expertise, knowing your weaknesses will help you become a better version of yourself.
Leave a Reply