Although the last few years have seen good returns on my investments, I’m now afraid to check my portfolio. It’s hard to watch your assets dwindle as the stock market continues to dive. So, what do you do? If you’re losing money in the stock market, here’s some real investment advice to help you protect your assets.
Real Investment Advice during Economic Downturns
Your investment strategy will depend on your personal financial goals and level of risk tolerance. However, there are a few fundamentals everyone should revisit as the current market conditions persist.
1. Don’t make rash decisions.
The markets are constantly in flux. Therefore, it isn’t unusual to see large fluctuations even within the same day. Unfortunately, most investors have seen significant losses since the beginning of the year. Markets are down nearly 20% YTD (through July 1), and it could get worse before it gets better. However, pulling your money out of your investments is the last thing you should do.
Most financial advisors will tell you to ride it out and wait for the market to rebound. However, it can be hard to watch and make people feel as if they have to take action now to correct it. Although it may seem illogical, you need to trust the investment strategy you have devised with your financial planner. Don’t make rash decisions or major changes in your portfolio out of fear. Focusing on the day-to-day losses is short-sighted and will undermine your entire strategy.
Like the laws of physics, every stock that goes up must come down and vice versa. But if you sell when prices are low, you’ll never be able to recoup your losses when the market rebounds.
2. Timing the market is impossible, but managing risk is not.
One of the biggest mistakes investors make is thinking that they can time the market and make a fortune. Attempting to pinpoint the perfect time to buy and sell is impossible. And if you do it consistently, you’re probably going to lose a lot of money. Furthermore, the cost of waiting is typically greater than the benefits of timing the market right. Even badly timed investments are better than waiting for the right time to invest.
Therefore, it’s better to manage risk than to gamble it all on timing. Create a process to help you recognize when it’s time to reduce or increase your risk level. And be sure to enforce some self-discipline if you feel the need to make drastic changes as the markets dip.
3. Even when the markets are down, continue to invest.
Again, while this may seem counterintuitive, financial advisors will tell you to continue investing through economic downturns. There is no accurate way to predict when the market will bottom out. So, it’s better to take action rather than procrastinate until more favorable conditions.
Even if your returns are diminished, you can still work to build your net worth. Making regular contributions, even in a volatile market, is the best long-term approach to growing your wealth. And, it may even create new opportunities. The silver lining of an economic downturn is the chance to buy on the dip. If you buy low, you could make huge profits when prices stabilize.
4. Diversify your assets to minimize your losses.
Diversification is a key strategy to insulate your portfolio against market fluctuations. This technique prevents you from putting your nest egg in the same basket. Instead, you allocate your funds across multiple sectors and companies. Each sector will perform differently through various market changes. So, investing in different industries and categories will minimize your losses. While it cannot eliminate the risk, it can reduce your market exposure and allow your gains to offset your losses. This strategy offers greater stability to your portfolio, especially when markets are volatile.
Additionally, investing in different asset classes will offer even greater diversification. You could also invest in mutual funds to achieve instant diversification. Whatever route you choose to achieve it, diversification will mitigate risks and limit your market exposure.
5. Don’t risk what you aren’t willing to lose.
Any list of real investment advice should include the golden rule: never invest money that you aren’t willing to lose. While tempted to gamble on opportunities that have come along, I’ve learned that things that sound too good to be true usually are. There are no sure things in life, and it isn’t worth losing the money you need to survive.
Although I typically have a moderate risk tolerance level, I tend to take a more conservative approach when investing through bear markets. Rather than risk a huge loss, I prefer to err on the side of caution. You will never find me on r/WallStreetBets or investing the money I need to pay my bills. I would rather pass up a potentially profitable opportunity than risk money I depend on and lose everything.
The Bottom Line
As an investor, watching the hits your portfolio takes during economic downturns can feel like a gut punch. And with the looming threat of a recession, many people are starting to panic and feel the need to take immediate action. However, impulsive decisions meant to protect you could cause your more harm in the long run. This is the time to think before you act and turn to the experts for real investment advice.
It can be difficult to know what steps to take if you are worried about your financial security. When markets dive, it’s hard to determine when it is best to stay invested vs selling for a loss. Therefore, it’s crucial that you learn how to manage risk and have a plan in place. Talk to your financial advisor to help you sort through your options and create the best strategy for you.
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