How to overcome market downturns?
The spread of the coronavirus has disturbed investors. The fears of new outbreaks can push down global demand. The S&P 500 closed down 3% on Tuesday, the index is deeper in the red.
Markets are down, an inverted yield curve is noticed, coronavirus is progressing and spreading all over the world. Everything tells us that we should be afraid. This inverted yield curve is proof of investors’ fears. They are starting to fear the worst and sell in panic. Almost all benchmark indexes are decreasing. While we have several things that can help- us to avoid infection by COVID-19, what can we do to protect our investments?
Stock markets suffered two big drops so far this week. Coronavirus outbreak made a great influence on the global stock markets. An economic downturn has increased quickly following China. It is the reality now in the US, Middle East, and Europe.
The best sign of how this situation is difficult is visible among the investors who are looking for safe havens for their capital. But there are so many signs that worry us. The yields on U.S. government bonds are dropping to near-record lows and showing red flags. Further, returns are higher for short-term debt in comparison to the 10-years bonds meaning, yields continue inverted. Everything is opposite to the regular situation and some of the experts think that is the sign the recession is coming.
But our intention is not to cry over this situation. We would like to discuss how to turn this market downturn to our benefit. Is it possible at all? We are receiving controversial information from our governments, experts have their interests also. That makes confusion among investors especially when it is so obvious that stock markets are down. As we said, let’s try to find the way out there. The mother of all questions is:
Should we invest when the markets are down?
In short, yes. Why shouldn’t we? We should invest in any case no matter if the stock markets are down, sideways, or they are up. The essence of investing is to reach settled financial goals. To do that we have to keep our eyes on our investments, to the stock prices, no matter what kind of market condition is. That’s a general duty while investing. Otherwise, everything will go apart.
Let’s say you are going to shop and you notice that something you planned to buy is on discount. What will you do? Step away? Will you buy it or not? Of course, you will. When it comes to stocks, why would your decision be different? As far as we remember, investors’ mantra is “buy low, sell high”, right? Actually, when everyone is selling, the smart decision is to buy. That is according to Warren Buffett. But where is the catch? Don’t buy if you didn’t plan that or just because you saw someone is doing so. Buy only after you made a consistent plan of your investment. Buying cheap stocks just because they are on sale can be the wrong move.
Buy, buy, buy
We don’t want to diminish the influence of the coronavirus outbreak. It is a horrible situation, a possible dead-ending disease, very dangerous. But what we know is the financial markets have been almost immune to the influences of earlier epidemics.
Stock prices are affected by various outside factors and some of them have nothing to do with companies’ operations, that’s true. The prices will decline on the bad news such as the coronavirus outbreak or a downturn in the overall economy. But that has nothing to do with the company, to repeat. The circumstances like this one actually represent a great opportunity. For example, you were looking at some company for a long time and its stock was too pricey for you. Due to the markets down it becomes cheaper. Maybe you have enough capital to buy it since it is such a good market player.
We have a great reason to change our position and buy more stocks
Why not? It is a good time to buy more at fire-sale prices. But what if you don’t have suitable cash to deploy? Think! Maybe you can find one or a few investments in your portfolio to sell and buy a new one.
Always keep in mind, your investment decisions should be based on your financial goals, not managed by market movements. That’s why you should buy stocks when markets are down only if you wanted particular stock and it is suitable for your goals. Don’t rush with that because buying stocks just because they are cheaper at this very moment is also an emotional reaction as much as selling when the markets are down.
What are we doing instead?
Well, we are doing smart trading. We must have a plan, investing schedule and stick with it. That means we already planned some cash reserve and we are ready for a situation like this new market downturn is. So, we are able to look at this like a buying opportunity that comes.
Buying stocks while everybody is selling isn’t a strategy without risk. There is always a chance that the market doesn’t go to the bottom. But if we buy when the markets are down, we have a chance to have larger gains when the market rebounds. More than the investors who didn’t buy.
A few days of bad news are not a reason to sell in panic
To be honest, drastic drops can be upsetting to look at. The markets trended upward for so long and suddenly we have this. But we have to consider this situation as a buying opportunity.
The worst strategy when the markets are down is to sell your portfolio. Okay, maybe the worst of the worst is to take the short positions. The stock market knows how to punish investors who are too bearish.
Rather, maintain a notable piece of your portfolio in stocks, even now when the stock markets are down. The point here is to be in position and take advantage when the markets turn forward. Of course, you would like to protect your portfolio against dangerous market forces as much as possible.
So what and how to do it?
Well, you have to reduce your stock exposure but you have to keep the main strengths. Keep the winners. You can sell the positions that are not performing well because they represent the weak part of your portfolio. So, during the market correction or situations like this one when the markets are down, those stocks or funds might get the most critical hit. Further, even when the markets are down you may have some positions that are extremely good but you assume that they will not play so well. Your actions should be – take a profit. Yes, why not? Just do it at market peaks to have profits.
Further, consider the way you invest, maybe it’s time to change something. Maybe index-based ETFs are not the best choice, they work well during bull markets, but bear markets are less safe.
Don’t follow the prevailing sentiment and sell investments. Rather sell risky positions, for example, some with a high beta. Also, think about selling some with a history of volatility. Yes, we know there are some investors who sell their positions in the most steady companies to avoid losses. What we can say is that they are very nervous. Who else wants to sell everything and sit at the sideline? You know, the market will bounce back one day. But if you sell everything you hold now you will miss big gains when it happens. Sell risky investments only, as we said. Hold blue-chip companies!
Bottom line
The keyword for overcoming the market’s downturn is advance preparation. There is no better strategy. The nature of the stock market is to experience declines from time to time. Preparations mean having enough cash to provide ourselves more opportunities in investing. Think about this downturn as a normal cycle. As said, it is so normal for the stock market to go down after it reached its peak. Savvy investors made some other preparations while the market was at the peak. They already lowered their exposure on time.
But it isn’t too late yet. At least once in life, every single investor has to deal with weak market conditions. So, we truly believe you are prepared for this one. Stay calm, lower your exposure to stocks, sell stocks that are not good players, buy more. But never try to stay at the market with knee-jerks reactions. Don’t sell in panic, that will ruin your investments, your capital, family and finally you. Stay stick with your investment goals and wait for the market to rebound. It is the only proper way to overcome the market’s downturns.
