Investing in the Market: Why You Shouldn’t Panic When the Market Goes Down
As a Financial Adviser who has experienced many market downturns, one common theme we see across our ‘mum and dad’ investors is nervousness when markets fluctuate, or stay down for long periods of time. Investing in the market.
We are in a market like this right now.
2022 was the worst share market performance for the S&P500 since 2008 (and I would almost say the worst performance ever!).
Rather than experience nerves in a market like this, you can train your mind to see this as an opportunity.
Certainly, this is what the world’s most experienced and successful investors do.
In particular, this is timely advice right now because it is largely agreed that we are coming to the end of the current market downturn.
You could apply that to residential investment property in New Zealand.
You could apply that to the share markets.
You can even apply that to crypto investing.
Right now poses an amazing opportunity to ‘get in’ before the markets turn and begin their next ‘bull run’.
Investing In The Market
The economic downturn began in November 2021.
As of July 2023, that was around 20 months ago.
The average that downturns have previously lasted for is 19 months. So, we are overdue a recovery, and we should see signs of this as the second half of 2023 plays out.
The stock market is cyclical.
This means that it goes through periods of ups and downs.
These ups and downs can be quite dramatic, and it can be very tempting to sell your investments when the market is down.
However, if you sell your investments when the market is down, you are locking in your losses.
Equally, investors can see investing in cash as the answer and pull their investments away from other asset classes in favour of this ‘safer’ option.
There are several reasons why you should stay the course in investing in the market despite downturns in the market.
- The market has historically trended upwards over the long term. This means that if you stay invested for the long term, you are more likely to achieve your financial goals.
- Market downturns are a normal part of the market cycle.
- They happen all the time, and they are usually followed by market recoveries.
- Don’t focus on a year or two, focus on decades instead. And, remind yourself of your investment ‘why’.
- Why are you investing? Is it to profit in the short-term as traders seek, or is it for long-term wealth creation. If the latter, then staying the course in the markets should form an essential and predictable (and unemotional) part of the journey for you. Expect the unexpected in other words.
- Selling your investments when the market is down is a recipe for disaster.
- You are locking in your losses, and you are missing out on the opportunity to benefit from the market’s eventual recovery.
So, how do you stay the course in investing in the market despite downturns in the market?
Here are a few tips:
Have a long-term investment horizon.
This means that you should not expect to get rich quickly in the stock market. Instead, you should focus on investing for the long term, such as 10 years or more. This is especially true for investing towards a retirement/financial independence goal.
Diversify your investments.
This will help to reduce your risk and protect your portfolio from market volatility. Your asset allocation should match your age-based ability to take on volatility and investment risk. This will change as you age, so your investment portfolio should change accordingly. This is never a ‘set and forget’ mindset.
Stay informed about the market.
This will help you to make informed investment decisions and avoid making rash decisions based on emotion.
Have a plan.
This will help you to stay calm and focused on your goals, even when the market is volatile.
If you follow these tips, you will be more likely to stay the course in investing and achieve your financial goals.
Here are some additional tips for staying the course in investing in the market:
Don’t panic.
It’s easy to get caught up in the emotion of a market downturn, but it’s important to remember that the market will eventually recover.
Reinvest your profits and dividends.
This is a great way to dollar-cost average into the market and take advantage of lower prices.
Don’t try to time the market.
This is a fool’s errand. Instead, focus on investing for the long term and let the market do its thing. This is why we strongly recommend ‘Dollar Cost Averaging’ (we’ve spoken about this in previous articles and above).
Don’t be afraid to ask for help.
If you’re struggling to stay the course, talk to a financial adviser. They can help you create an investment plan that’s right for you and help you stay on track.
If you follow these tips, you will be more likely to stay the course in investing and achieve your financial goals.
Here are some examples of investors who have benefited from staying the course of investing in the market
Warren Buffett: Buffett is one of the most successful investors of all time. He has achieved his success by staying the course and investing for the long term.
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John Templeton: Templeton is another legendary investor who benefited from staying the course. He was known for buying stocks when they were out of favour and holding them for the long term.
Peter Lynch: Lynch was a successful fund manager who made a fortune by investing in small-cap stocks. He also benefited from staying the course and investing for the long term.
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These are just a few examples of investors who have benefited from staying the course.
If you’re looking to achieve your financial goals, it’s important to remember that the long-term is what matters most when investing in the market.
So, stay the course and don’t panic.
The market will eventually recover.
Remember to tell yourself that this is all a standard part of the journey.
There is a reason we have the saying ‘Fortune Favours the Brave’ – You too can be brave!
Go forth and conquer!
Daniel Carney
Financial Adviser
Goodlife Financial Advice