The recent market declines, including the stock market crash of 2008, are becoming distant memories for many of us. Those who persisted in their investments throughout these trying times may have ultimately fared the best.
Economic recessions and stock market collapses are a fact of life. As the COVID-19 outbreak shown, market catastrophe may appear out of nowhere. What matters is how investors respond to that disaster. Do not give up. Do not act hastily to sell into a declining market because of feelings of dread or anxiety. Keep enough cash on hand to avoid needing to sell your investments to pay for it.
In such cases, managing cash flow and having a firm grasp of the markets are essential. This is why. No matter how severe the drop, investor portfolios have historically recovered from their value losses. Over time, markets start to stabilise and see growth.
When shares are cheap, you may continue to invest and perhaps buy more. Investors who sell during market downturns in an effort to limit their losses and wait things out on the sidelines are not eligible for these chances.
We discuss three convincing justifications for not selling during a market slump below.
KEY LESSONS
- As portfolio values decline and volatility increases, a market crash can result in significant dread and anxiety.
- You might feel tempted to liquidate your investments and wait out the market slump.
- If you use that strategy, you can miss future price gains by selling at a loss.
- It's critical to realise that market downturns will occur and pass eventually.
- Planning is essential to putting concerns in check and avoiding actual losses from selling too soon.
1. Upturns Always Follow Downturns
Investors' loss aversion instincts might understandably take control in down markets. They believe that they will lose more money if they don't sell. The value of the portfolio will generally stop declining, though. Prices will rise once more.
Investors will really lose money if they sell during a market decline. Many investors have discovered that if they remain patient and wait for the upswing, they won't suffer a loss. They could even observe an increase in the value of their portfolios above what they were before to the slump.
It might be difficult to observe market price declines without selling. But according to data, a bear market typically lasts one year on average, whereas a bull market typically lasts four years. Bear markets often experience declines of 30%, while bull markets typically see gains of 116%.[1][2]
The crucial thing to keep in mind is that a bear market is only ever fleeting. The succeeding bull market cancels out its falls and even increase the prior bull market's gains.
Missing out on the future market's significant profits is the biggest danger for investors. Even while the past cannot predict the future, it should give some comfort that things do have a tendency to turn around.
2. The Market Cannot Be Timed
Market timing is really challenging. Market timing practitioners almost often miss some of the market's greatest days. Six of the market's 10 best days have historically happened two weeks or less after its ten worst days.
J.P. Morgan estimates that between January 4, 1999 and December 31, 2018, an investor with $10,000 in the S&P 500 Index who maintained a complete investment would have made nearly $30,000. An investor who left the market and missed ten of the finest trading days per year would have less than $15,000. A extremely cautious investor who missed 30 of the finest days would have less money at the end—exactly $6,213—than they had at the beginning.
As a consequence, consider purchasing rather than selling while prices are falling. Even when stock prices decline, you may dollar cost average and construct your portfolio with a reduced cost basis by steadily acquiring more shares.
3. The goal is to continue investing.
In contrast to investors who exit the market during downturns and re-enter it later, long-term investors with a 20- or 30-year investment horizon who stay involved despite market declines are likely to see less of a negative impact on the value of their portfolios.
The 2008 stock market collapse the market correction that followed the 2016 Brexit vote. These things were not pleasant. For long-term investors, sticking to their investing objectives and using a strong investment plan are more crucial. Volatility may be controlled with a well-diversified portfolio that includes a variety of asset classes.
Emotions like fear and greed shouldn't influence your course of action if you remain focused on your long-term investing goal. In spite of market ups and downs, if you make a set amount of monthly contributions to your portfolio, maintain doing that! Re-allocate when stocks decline to recover your target weights at a relative discount if your target allocation is 80% equities and 20% bonds.
What has been the U.S.'s longest bear market?
The 2000–2002 bear market lasted 2.5 years. The bear market from 1930 to 1932, which lasted 2.1 years, was the second longest.
Which U.S. bear market drop has been the largest?
The stock market saw an 83% decline over 2.1 years from 1930 to 1932.
What Strategies Can Investors Use to Stay Calm During Bear Markets?
Due of the strong influence that emotions may have on our behaviour, it can be challenging. Here are some recommendations instead. First, when you start investing, make sure you have a strategy in place that specifies your objectives and investment methods and tells you to stick with it even if prices fall (short term or prolonged). Second, keep in mind that bear markets eventually end. Third, stay away from the terrified and perhaps frantic discourse you may see on news websites and elsewhere online. Finally, seek soothing guidance from a reputable financial advisor with market knowledge.
The Bottom Line
Successfully managing any portfolio requires the patience and discipline to remain with your investing approach. If you have a long-term investing plan, you'll be far less inclined to rush off the cliff with the herd in a panic.
Instead of selling out of panic, increase your purchases during a down market. If you can, buy shares at steep discounts and diversify your holdings. When things do turn around, your portfolio will be better positioned for growth.