It isn’t pleasant, but there’s a way to make the most of market downturns.
The stock market has brought wealth to millions of investors over the long run. To claim your share of that wealth, however, you have to be able to endure just about everything Wall Street throws at you — and you’ll have to fight your own emotional responses in order to stick with your winning strategy.
Most investors understand that stock markets go up and down, sometimes violently. When the entire market takes a plunge, it’s painful, but it comes with the somewhat comforting feeling that just about everyone’s in exactly the same boat. Together, you can ride out the storm — like so many people did in early 2020 — and emerge stronger, wiser, and richer.
What can actually hurt more, though, is when your stocks seem to take the brunt of the damage. It can make you question your ability to choose stocks for the long haul. It can even make you give up on investing in great companies entirely. As understandable as that reaction is, it’s the wrong approach. There are ways to turn your gut reactions into actionable and valuable guidance, but first, you have to get some perspective and get your emotions under control.
When you feel like you’re missing out
The market over the past few months has been hard to handle. Big swings have taken major market benchmarks to record highs, only to fall back downward again. Even those investing in index funds have had to deal with volatility.
Yet investors who’ve identified pioneering and disruptive stocks in high-growth areas like technology have had to go through an even wilder ride. After seeing amazing returns throughout much of 2020, a lot of these former high-flying stocks have fallen 20%, 30%, or even 50% or more of their value in a very short period of time.
What’s more, many of these drops are happening even as these companies are announcing strong business performance. Growth is still there, and in many cases, future prospects look just as bright as they’ve been in the past. Yet share prices are falling.
3 things to do to keep your cool
When your stocks are falling more than the overall market, don’t panic-sell. Instead, follow this three-step plan to get your feet back under you and then take appropriate action.
1. Know why you own each stock in your portfolio
Every stock you own is in your portfolio for a reason. If you own a stock, you’re expressing your belief that the company’s fundamental business will thrive and prosper in the long run. So when you find yourself doubting that belief, it’s a good time to reacquaint yourself with the company’s business model and how it intends to grow and make money in the future.
Occasionally, that examination will reveal that there’s been a true change in the business environment that contradicts the original reason you bought the stock. More often, though, you’ll find that the same reasons you invested in the first place are still intact, and that’ll help give you the resolve to overcome the market’s inevitable volatility.
2. Look beyond right now
If you just bought a stock right before it dropped, then it’s easy to feel like your timing is horrible. But keep in mind that in most instances, you’ve made other investments before, and you’ll have new opportunities to invest in the future.
Say you’ve owned a stock for a year and it doubled in price before falling 25%. All told, you’re still up with a solid 50% gain.
Conversely, say you just bought a stock and it fell 25%. If it doubles in price from here, you’ll be up the same 50% on your original investment.
3. Take advantage of panic
Once you’ve gone through that calming process, you’ll often emerge feeling more confident about your stocks than ever. That shows the value of having some spare cash to invest during episodes like this, because you can pick up the stocks you love even more cheaply.
When you’re first starting out, though, you’ll want to be prudent with your opportunism. It’s entirely possible that stock prices will fall even further. Investing a portion of your available cash while holding some in reserve for even bigger potential bargains down the road can be a good middle ground. You won’t always get that second chance to buy even more cheaply, but it can help you keep your wits about you if a downturn gets even more severe.
Fear is the mind-killer
No one wants to feel like they’re the ones losing the most money in the stock market. Unfortunately, even with great companies, downward moves like this happen. If you can get past them and stick to a long-term game plan, though, then you’ll have learned the secret that so many investors are never able to use to their advantage.
A MyWallSt subscription gives you access to over 100 market-beating stock picks and the research to back them up. Our analyst team post daily insights, subscriber-only podcasts and the headlines that move the market. Get your free trial now!