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03.10.2023

Stock Market Down? One Thing Never to Do

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Nadia Khan DipPFS Cert CII (MP), Fairstone Financial Management LTD Financial Adviser

Stock Market Down? One Thing Never to Do

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  • When the stock market goes down and the value of your portfolio decreases significantly, it’s tempting to ask yourself or your financial adviser (if you have one), “Should I pull my money out of the stock market?” That’s understandable, but most likely not the best course of action.
  • The answer is simple: Don’t panic. Panic selling is often people’s gut reaction when stocks are plunging and there’s a drastic drop in the value of their portfolios. That’s why it’s important to know beforehand your risk tolerance and how price fluctuations or volatility will affect you. You can also mitigate market risk by hedging your portfolio through diversification holding a variety of investments including some that have a low degree of correlation with the stock market.

Why You Shouldn't Panic

  • The reason is a lack of confidence in the market due to the 2008 financial crisis and the considerable market volatility of the past year. Additionally, those without sufficient savings to get by month-to-month generally don't have money to invest in the market either.
  • A stock market decline, due to a recession or an exogenous event like the COVID-19 pandemic, can put core investing tenets, such as risk tolerance and diversification, to the test. It’s important to remember that the market is cyclical and stocks going down are inevitable. But a downturn is temporary. It’s wiser to think long-term instead of panic selling when stock prices are at their lows.
  • Long-term investors know that the market and economy will recover eventually, and investors should be positioned for such a rebound. During the 2008 financial crisis, the market plummeted, and many investors sold off their holdings however, the market bottomed in March 2009 and eventually rose to its former levels and well beyond. Panic sellers may have missed out on the market rise, while long-term investors who remained in the market eventually recovered and fared better over the years.

The Bottom Line

  • Knowing what to do when stocks go down is crucial because a market crash can be mentally and financially devastating, particularly for the investor. Panic selling, when the stock market is going down, can hurt your portfolio instead of helping it. There are many reasons why it’s better for investors to not sell into a bear market and stay in for the long term.
  • This is why it’s important to understand your risk tolerance, your time horizon, and how the market works during downturns. Experiment with a stock simulator to identify your tolerance for risk and insure against losses with diversification. You need patience, not panic, to be a successful investor.

 

  • Investment Planning
  • stock market
  • time horizon
  • long term investment
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Nadia Khan DipPFS Cert CII (MP) Fairstone Financial Management LTD Financial Adviser

I am an Independent Financial and Mortgage Adviser and have worked in Financial Services for over 12 years. During my career I gained experience in assisting both individual and corporate clients.…
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