10 Tips for Investing in a Down Stocks Market

How to maximize your chances for investing success when stocks take an extended turn for the worse

Unless a lot of other breaking news occurs on a particular day, sharp drops in the stock market make headlines — stock market gyrations are great media fodder. Every day the market environment is different, and new stocks are always plunging and rising.

And now, with more individuals holding stocks (including mutual funds and exchange-traded funds) through company and personal retirement plans, most folks watch financial market movements.

1 Don’t Panic

No one enjoys turning on his car radio, clicking on his television set, or logging on to the Internet and getting this news: “Stocks plunge. The Dow Jones Industrial plummeted 400 points today.” When you hear this news, don’t panic — it’s just one day’s events. (In 2008, the market seemingly had day after day of such drops, and the events could accurately be described as a financial panic, the likes of which the nation hadn’t experienced in generations.

No one enjoys turning on his car radio, clicking on his television set, or logging on to the Internet and getting this news: “Stocks plunge. The Dow Jones Industrial plummeted 400 points today.” When you hear this news, don’t panic — it’s just one day’s events. (In 2008, the market seemingly had day after day of such drops, and the events could accurately be described as a financial panic, the likes of which the nation hadn’t experienced in generations.

Just because a home burned to the ground recently in your town and the news is being broadcast all over the local media, you probably wouldn’t start living on the street out of fear of being at home during a fire. But you may take some sensible precautions, such as installing smoke alarms and repairing any malfunctioning appliances that may cause a fire, to ensure that your home isn’t likely to become the next fire department statistic.

Likewise, don’t shun stocks, which produce terrific long-term returns, just because of the down periods. Risk and return go hand in hand. If you want wealth-building investments that provide superior long-term returns, you must be willing to accept risk (that is, volatility and down periods).

You should take sensible precautions — with diversification being the star of the show — to reduce your risk. Although other wealth-building investments, such as real estate and small business, go through significant declines, you generally see few headlines on their daily price movements.

A good reason for this lack of headlines is that no one reports on the pricing of real estate and small businesses minute by minute every business day, as is done with stock prices.

2 Keep Your Portfolio’s Perspective in Mind

If you follow my advice, your portfolio will consist of diversified stock holdings, including some international stocks and some bonds. Having a diversified portfolio can help in a down market because some investments will increase as others decrease, thus balancing the losses. Make sure you build a diversified fund portfolio.
3. View Major Declines as Sales

Unlike retail stores, which experience larger crowds when prices are cut, fewer investors, especially individual investors, want to buy stocks after they’ve suffered a sharp decline. However, when stock prices decline, don’t get swept up in the pessimism. View declines as the financial markets having a sale on stocks. Stocks usually bottom when pessimism reaches a peak. Why? Those who were motivated to sell have done so, and the major selling has exhausted itself.

During the recession and stock market decline that reached a crescendo in 2008, negativity and pessimism were rampant. Global stock prices dropped by half in about one year’s time. The banking and financial system was in crisis and governments were intervening. Talk of a depression became common as U.S. unemployment surged past 10 percent.

After bottoming in early 2009, stocks went on an upward rampage that resulted in a doubling in value in just two years — a rare historic event. Now, I’m not saying you should randomly buy just any stock after a decline.

When technology stocks started declining in 2000, some investors made the mistake of buying more of them after prices dropped 10 or 20 percent. What such “buy on the dip” investors didn’t realize was that the technology stocks they were buying were still grossly overpriced when measured by price-earnings ratios and other valuation measures.

You’re best off buying stocks gradually over time through well-managed, diversified mutual funds . When the broad stock market suffers a substantial decline and stocks are at reduced prices — on sale — you can step up your buying.

Read Full Article Here: 10 Tips for Investing in a Down Stocks Market

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s