A few weeks ago China, with the second buggest economy in the world, came down with a serious bout of flu which sent trading floors across the world into a tailspin. Despite conventional wisdom consistently telling us that markets will rise and fall, you’d think experience would have taught us how to behave when markets go haywire, but the rate at which people tossed shares out of their portfolios tells you otherwise. Anytime stock markets go through a period of intense volatility you really get to witness the blurry line between greed and emotion.
To the novice invesor these dips in the market and all the scary reports that come with it could prompt impulsive and panicked decision making. This is why having an investment strategy in place for market dips helps. We have three basic components that you should always employ to refine your investment strategy and deal with market dips in a smart way.
1. Time is your friend, so is compounding: Having a long-term investment horizon shields you from the market’s day-to-day volatility while allowing your investment to appreciate in value (provided that you’ve make a wise investment decision, of course). With time, you not only reap the smoothed out benefits of the appreciating market, but you also benefit from the power of compound interest
2. Diversification: This is very important when you’re picking stocks. Concentrate too much capital in one sector or company and you increase the risk of losing money should that industry go through a turbulent period. Diversification will help bring a little balance into your portfolio, especially if you know that you cannot stomach a rollercoaster market. Guard against under- and over- diversification, and keep a close eye on costs as well. You need to make sure that your portfolio is still valuable, despite being spread across sectors.
3. Make volatility your friend: A market dip is a great opportunity for you to buy valuable stocks or ETFs at a lower price. Having a savings account that you can dip into when stocks are low is always a good idea. Don’t let day-to-day market movements get in the way of your long term strategy. Most investors have heard these wise words: buy low, sell high. Do not make the mistake of selling shares at a loss because of market volatility. If you wouldn’t throw money out of the window for no reason, don’t throw away money in your portfolio either. Besides, if you’re investing for the long term, day-ti-day market movements should bring opportunity.
Lastly, don’t panic.
Easier said than done. When you peek into your portfolio, don’t compare values. If you’re a long term investor you should understand that the nature of markets involves dips such as these and the market will always correct itself. When the market is on a bull run, that is when stocks are rallying at record highs, you should prepare yourself for the dips, they are coming. If you’re prepared, they could be a great opportunity.