When the stock market collapses, your stomach can reach your shoes too. Watching all that money go away at once can be scary for anyone, no matter how stoic or optimistic you are. It is not easy to know what to do when stock prices have fallen.
It may be a cliché, but as the saying goes: “What goes up has to go down”.
However, if your stocks are giving way, it’s not time to panic and get out. For anyone who has invested in the stock market, drops are not ideal. However, you need to know that stocks are likely to fall as they cannot always go up.
If you’re worried about your stocks and their value while watching the stock market crash, here’s our advice on what to do if stocks go down.
Why are stocks falling?
First, let’s outline why stocks fall in the first place. The stock market prices rise and fall every day due to market forces. Stock prices end up changing based on supply and demand. When the company is doing well, more people will want to buy the stock rather than sell it. When the company goes down, more people sell it and the price goes down.
In the end, the stock market can be driven by various factors, but the demand for them determines stock prices at any given moment. For example, if something bad happens to the company that seems to put it in a worse financial position, people won’t want to buy stocks, so the price will go down and down until people are comfortable trading them back and forth.
What should you do with your portfolio if stocks fall?
Of course, given the choice, your stocks would always be in demand. However, it doesn’t always work that way. If your stocks are falling in value, here’s what you should do.
Don’t panic and sell everything! Instead, take a few deep breaths and relax. Even if it doesn’t always work for the better, it’s usually best to persevere. You read that right. Do nothing. Most importantly, don’t panic when selling. Instead, hold on to the stocks and reevaluate the situation.
Think about the companies you have invested in and whether the companies are still in line with your investment priorities. Are the companies you are investing your money in still matching your portfolio criteria? If so, hold on and wait for the light at the end of the tunnel. If not, take a few more deep breaths before taking the next step.
It’s also beneficial to remember that investing with a long-term mindset can help you make much more money in the long run.
Here is an interesting picture for you:
This chart shows what happens if you pull your money out and end up missing out on the best 5 or 10 days that the company’s stocks see. The only way to ensure that you get the best 5 days over a 10 year period is to stay invested all the time.
Make sure you are varied
The next step that you should consider is diversifying. Diversifying your portfolio is the best way to protect you and your money.
Diversification involves holding a wider variety of investments in all types of industries, not just a variety of companies. That means you can invest in IT companies, hold some international equity, index or bond funds, or invest in real estate funds. There are so many places and areas that you can invest your money in. The more you distribute the wealth, the less you lose if one of the industries or companies collapses for a while.
The truth is, choosing your asset allocation is more important than ever making a single stock selection. But even if you’ve bought all kinds of different stocks, you’ve still only invested in stocks and are not really diversified. If you’re taking this step and want to learn more about diversifying your portfolio, check out this article.
Consider buying from the Dip
The other side of a market downturn is the ability to use and buy up certain stocks. This is how you make money when stocks go down. Market collapses often occur when wealth is made. However, they can be difficult as you need to be prepared for their fall and then be ready to sacrifice that money if they just keep falling.
The best way to be ready to buy in a dip is to be specific and save up for it. Our suggestion is to keep an on-going list of every single stock that you would like to own one day. Call this your “goods list”. Even if you might not send it to the North Pole, you can still make your own wishes come true. Keep an eye on companies for moments when they are sinking.
It is also important to make sure that you are only using money that you have set aside for investments. When you see what you think is an opportunity during a market downturn and you decide to invest your emergency funds, you are taking a lot more risk than just unlucky enough to pick stocks. Likewise, you should never invest money that you think you will need to use for years to come. Sometimes it may pay off for people, but the risk of being penniless in the future is never worth it.
We usually recommend people put most of their money into 401k, index funds, and Roth IRAs. Then, if you want to invest 5-10% of your investment money in individual stocks, it will only be a small percentage of your portfolio when you lose it.
Don’t try to time the market
If you’re a long-term investor, you need to manage your stocks so that you can hold them for years to come. If you keep checking in to see a low time frame on certain stocks so you can buy them up, you will end up going insane. An observed pot never boils and so on.
Instead, regular investments will result in more solid returns over time. Getting into something to make a quick buck is rarely a good idea. Being smart and patient is the best combination for making the most money in the long run. Don’t feel pressured to buy at a low. Just use it when it’s available.
Keep calm and think about the long haul
Long-term thinking is difficult for us, but it is necessary if you want to invest successfully. Some people may invest in the short term, but if not done well, it doesn’t always end well. Think long term and invest long term. With years of investment, a dip will no longer play a role. Low points are all part of the process.
Think of Apple as a good example of this. Those who have invested long term have achieved tremendous returns. From 1995 to 1998, the company saw some major slumps and at one point posted a whopping loss of about 41%. They have since closed at $ 188 and parted ways twice since hitting the horrific low in 1998. Long-term investors in the company have seen their stocks rise dramatically over the past 20 years, but have been utterly disappointed all those years ago.
The name of the game is … risk tolerance. You need to ask yourself how much risk you are willing to take and invest accordingly.
When you’re ready to panic, wrap up and go, take a deep breath, and realize that falling stocks is part of the process. If you haven’t diversified yet, you need to manage to spread the wealth and reduce the overall risk. You should consider buying when there is a drop, but don’t go crazy looking for one. And remember, you should invest for the long term.
If that still seems overwhelming to you, check out this article on investing for beginners to get a better grip on the stock market. If you’d like more guidance on what to do when stock prices fall and other money management issues you’re currently facing, check out our free resource below, the ultimate personal finance guide to getting your money to do that what you expect from him.
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