How To Invest During A Market Downturn (What To Do?)
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In this video, we will be looking at the previous corrections and bear market of the S&P 500 since 1928.
Doing so will help equip us with a deeper understanding of what to expect in times of significant drawdowns and losses and what we should do to protect our investments.
Without further ado let’s get started.
Correction & Bear market
Now lets us first define what is a correction and what is a bear market.
A correction is a decline of 10% or greater while a bear market is a decline of 20% or greater in the price of a security, asset, or financial market.
While bear markets occur less frequently than a correction, the occurrence of a market correction is more common than what most people would realize.
On average, the stock market undergoes one correction every one to two years and eventually, 14% of these corrections turns to a bear market.
Since 1928, the S&P 500 had experienced over 90+ corrections and 28 bear markets.
During, the average correction lasted around 3 to 4 months and prices dropped around 13 to 14% during that period.
On the other hand, the average bear market lasted around 10 months and prices dropped around 36% during that period.
While corrections are commonly caused by a sudden change in investor sentiment, a bear market is commonly caused by economic factors that often result in a recession.
Such factors include
excessive speculation in the stock market
high inflation rate
rising unemployment rates
rising interest rates
declining corporate profits
What to do during a correction or bear market
Now that we’ve understood what an average correction or bear market would look like, what can we do during a correction or a bear market to protect our investment performances?
If you have a broadly diversified and disciplined approach, you will likely do well if you were to stay the course during a correction or a bear market.
We all heard of the saying that time in the market beats timing the market and the reason why this saying works are because if you are investing in a broadly diversified market that is growing, the market would typically trend upwards and you will eventually recover from your losses during correction or bear market.
We’ve seen this happen over and over again over the last 100 years and this is because if you are investing in a broadly diversified market that is growing fundamentally, the companies within the index such as the S&P are more likely to survive through a recession instead of going bankrupt.
Even if some of the companies within the index goes bankrupt, you will still not be badly affected as it will only represent a very small portion of your entire investment allocation.
Furthermore, if the companies can grow and improve their earnings after periods of recession, the value of your investments would tend to increase over time.
That said this saying would only hold if you are investing in a broadly diversified market that is growing instead of just picking a handful of stocks and shares.
If you are investing in a broadly diversified market, the last thing you want to do during a correction or bear market is to immediately sell off your investments in panic or to be forced to sell off your investment due to circumstances which bring me to my next point.
Why do investors end up selling during a correction or bear market?
While all of us understands that the worst thing to do in a correction or a bear market is to sell off your investments, in practice, many investors still find themselves selling off their investments in the worst possible time.
The reason why they would do that is either because they succumb to their emotions and sold off their investments in panic or they are affected by the accompanying recession and are forced to sell off their investments to pay for their expenses or liabilities.
If you have trouble controlling your emotions such as fear or anxiety during a bear market, the best thing you can do is to brush up on your knowledge and deepen your understanding of the markets so that you are not easily swayed by clickbaity headlines or day-to-day price movements.
If you want to avoid selling due to circumstances, what you need to do is to plan your finances properly and set aside sufficient buffers and cash flow for your short term needs so that you won't need to draw down on your long-term investments.
Now, If you do not know how to get started with your investments or if you do not have the time to manage your investments, you can check out what I do on my website here to see how you can benefit from my investment planning services and reach out to me directly.
Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides:
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This article is meant to be the opinion of the author
This article is for information purposes only
This article should not be seen as financial advice
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