Managing your capital

What should you do if the stock market falls?

Financial markets fluctuate and temporary volatility is part and parcel of investing. But that doesn’t mean you won’t get cold shivers from time to time. How best to respond?

Share prices might be nice and green one day, and deep red the next. After a strong climb in 2021, markets this year have suddenly become extremely fickle. Concerns that included rising prices, expected interest rate rises in the US, a slowdown in growth in China and, above all, the war in Ukraine have already had many investors running for cover.

Panic: a poor adviser

Especially if you have just started investing, a yo-yoing market can be unsettling and will probably have you checking share prices more often than usual. Should I sell now, or just buy more? What if the market drops further, or the opposite: what if I miss opportunities when the market rallies? In these kinds of situations, panic is a poor adviser. Impulsive buying or selling is unwise because investing is something you do for the long term—for at least three, five, seven years, or even longer. That is why it is essential to not let yourself be distracted by the prevailing sentiment of the moment. Of course, that is easy to say. Quite possibly your instincts are sending you exactly the opposite message.

Investing: between rationality and intuition

For a long time, it was assumed that investors behaved purely rationally: clearly weighing up risks and returns. At least, so people believed. Until more recent insights told a different tale: our behaviour on the stock market is not solely governed by rational considerations, but also by psychological factors. This has nothing to do with a lack of ‘sense’ or ‘insight’. It is all about influences and patterns that are hard for investors to avoid, however competent they are.

What are other investors doing?

While investing is something done on an individual basis, we also allow ourselves to be guided by our gut feeling and by other investors’ behaviour. For this reason, many investors are tempted to buy when they see others buying. Their actions might be reinforcing ‘herd behaviour’ and therefore not bear any relationship to underlying value or prospects. The opposite also applies; investors tend to bail out when other investors do. Sometimes investors will end up buying at the peak and selling in the trough as a result.

"Many investors feel induced to buy when other investors do."

Tip

Regularly check how your investments are doing when you deem it necessary. But keep in mind that you are investing for the long term. Many investors make themselves anxious by continually checking market prices. This often triggers impulsive buying and selling.

Recovery has always happened, but one needs to be patient

From time to time, you might have had the feeling that you got into the market at the ‘wrong time’. Or you might have thought about selling part of your investments when you noticed other investors doing so. Remember that investing is a strategy for achieving your future financial goals. Temporary drops—even very steep ones—are part of it, but as a rule they will recover. Whether it is a market crash, such as the one (in 1929) that caused the Great Depression, the Global Financial Crisis (2008), or the COVID-19 crisis (2020): the markets have always recovered, regardless of how severe the crises feel when we are going through them. 

It is critical to keep an eye on the broader horizon. Despite all the crises, maintaining investments brings higher potential returns over the long term.

Patience is usually rewarded

Even during major market slumps, patient investors usually seem to come off best. Investors who maintained their diversified investment portfolios during the 2008 Financial Crisis (those who kept diversified investments across various investments, markets and sectors), saw their portfolios not only return to previous levels a few years later, but dramatically increase. Sometimes patience is even more rapidly rewarded: in 2020, recovery took only a few months, after which the markets re-commenced their upwards surge.

‘Investors who maintained their diversified investment portfolios during the Financial Crisis (2008) and COVID-19 crisis (2020) watched their investments not only return to previous levels, but dramatically increase. It is, however, critical to diversify your investments.'

Seeing crisis as an opportunity

Professional investors may make use of slumps and crises to purchase high-quality stocks at bargain basement prices. This is a tactic which you can apply by making regular investments. To do this, you invest a specific amount every month or every quarter in an investment fund. It is, of course, important for you to adhere to your pattern if you invest periodically, particularly when the stock markets are not doing so well, as is now the case. In addition, this reduces the risk of basing your decisions mainly on your instincts. In short, it is better in general to stick to your chosen investment strategy and investment horizon rather than to be constantly stepping into and out of the market.

Keep the following tips in mind:

  • Do not give way to euphoria or panic.
  • Bear in mind that you are investing for the long term.
  • Track your investments' performance regularly, but not constantly (quarterly, for example).
  • Remain patient during crisis periods; historically, the market has always recovered.
  • Diversify your investments.
  • Consider investing regularly to prevent you from making emotionally charged decisions.
‘In general, it is better to stick to your chosen investment strategy and investment horizon rather than constantly stepping into and out of the market.'

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