Finance, During challenging times in the stock market, even the most resilient investors sometimes choose to avoid looking at the situation. Conventional investment wisdom advises against making decisions based on emotions. This is particularly relevant when market conditions are deteriorating, and investors are tempted to minimize their losses.
Studies indicate that it is generally more beneficial to refrain from hasty selling in moments of panic. However, is it considered inappropriate to seek out investment opportunities when stocks are experiencing a decline?
Brad Roth, the chief investment officer at Thor Financial Technologies, suggests that when one is gripped by fear and panic, it is precisely the moment to consider investing. Contrary to the notion that it is better to wait for a sense of security, such calmness might merely mask an approaching wave of volatility, according to Roth.
What is a sell-off?
A sell-off refers to the swift and significant selling of various securities, including stocks, bonds, or commodities. This can happen to an individual security, such as a company's stock, the 10-year Treasury note, or crude oil futures, as well as in the broader market. When the selling is relatively minor, it is often referred to as a pullback. The Associated Press provides this definition of a sell-off.
Have a plan
Having a well-defined plan is crucial when it comes to investing, particularly during periods of high uncertainty about the future. It is understandable if you were hesitant to buy stocks on March 16, 2020, when the Dow Jones Industrial Average experienced its largest single-day drop of nearly 13%. However, if you had exited the market on that day, you would have missed out on the subsequent significant rally that continued into the current year.
That's why Kristina Hooper, the chief global market strategist at Invesco, emphasizes the importance of creating a game plan before major sell-offs occur. One approach is to consider what stocks you would be interested in purchasing if the stock market were to decline by 10% within a specific period. If you find it challenging to select individual stocks, focus on identifying sectors that are not currently represented in your portfolio and explore exchange-traded funds (ETFs) and mutual funds that concentrate on those sectors. Hooper suggests conducting thorough research in this regard.
Importantly, it is advisable not to develop this plan on a day when the markets are experiencing significant rallies or sell-offs, as such market conditions can influence your choices. Instead, Hooper recommends devising your plan in an objective and unemotional manner, detached from immediate market fluctuations, and then executing it regardless of emotions as market conditions unfold.
Use dollar-cost averaging
One strategy recommended by investment advisers is dollar-cost averaging. This approach bears resemblance to employees opting to allocate a specific portion of their paycheck to be automatically invested in a 401(k), such as a target-date retirement fund.
When utilizing dollar-cost averaging, you consistently invest the same amount of money at regular intervals, regardless of the current trading price of the asset. If the price is lower, you will end up purchasing more shares compared to when it is higher. Consequently, this strategy can decrease the average cost per share over time, as opposed to attempting to time the market.
By adopting dollar-cost averaging, it is also possible to alleviate some of the anxiety that arises during periods of declining stock prices, as noted by Roth.
Try to maintain a long-term investment horizon
It is advisable to maintain a long-term investment horizon, especially if you are nearing retirement or have already retired. Individuals in these circumstances are more susceptible to stock market volatility compared to those with a longer investment timeframe.
If you do not have an immediate need for the invested funds, the most suitable approach is to stay invested for the long term, according to Hooper. The rationale behind this is that, over time, the significant fluctuations witnessed in the market tend to even out. This can be observed by examining any major index, as they all exhibit an upward trend.
Roth emphasizes that if you have a time horizon of at least 10 years, there is no justification for considering panic during market downturns. Maintaining a long-term perspective allows for a more steadfast approach to investing.
Conclusion
Navigating the stock market during challenging times requires a balanced approach. While emotions can influence investment decisions, it is generally advised to avoid making hasty choices based on fear or panic. Instead, maintaining a long-term perspective and having a well-defined investment plan can help mitigate risks and maximize returns.
Additionally, strategies like dollar-cost averaging offer a systematic and disciplined approach to investing, allowing for potential benefits in terms of reducing the average cost per share over time. By embracing a long-term investment horizon and remaining focused on fundamental principles rather than short-term market fluctuations, investors can better weather market volatility and position themselves for long-term success.
Remember, investing is a journey that requires patience, research, and adherence to a well-thought-out plan. By following these guidelines and seeking professional advice when needed, investors can navigate uncertain market conditions and strive towards their financial goals.