Today, we’ll give young investors some advice on how to get through the tough times in the stock markets.
1. Don’t try to “bottom out”
Under “catching the bottom” is usually understood as the purchase of shares at a time when they are at their minimum values. We do not advise you to wait, wondering when this will happen – it is almost impossible to catch that very second anyway. You need to buy assets according to your usual investment strategy, not paying attention to how scary it is at one time or another, how bad the news is, and how painful it is for the market to fall. In the long term, from one to three years, these purchases will prove to be very profitable.
2. Keep calm
Giving in to the general frenzy and selling during a downturn is probably the worst investment advice you could get in the market. Do not worry about temporary drawdowns caused by geopolitical fears – they are not related to fears for the profits of companies and their place in the global economy.
3. Use the fall as an opportunity
We regularly observe how, after a rise in the market, clients move towards more risk, and after a correction, towards less. Don’t be fooled by the cortisol surge: the market downturn on political headlines is an opportunity. Stocks purchased at this point are likely to be profitable investments over a one to three year horizon.
4. Stick to your financial plan
The best strategy during a market downturn is very simple: don’t run, don’t twitch, but stick to a smart financial plan. If you don’t have a plan yet, we’d like to share a couple of important principles for making one. Analyze your goals and objectives. Pay attention to the perception of risk as a limiting factor, to the income structure that is not dependent on the stock market, to the financial cushion already created and its quality.
Form a portfolio of market instruments in the appropriate proportion and replenish it regularly, regardless of the news background. If you are young, have an independent source of income and know how the stock market works, your portfolio should consist of almost nothing but stocks. The risk premium in equities significantly exceeds this parameter for most assets available to an ordinary investor: bonds, real estate, commodity assets.
5. Choose funds managed by professionals
Self-trading on a personal account for results is a full-time job or a source of adrenaline. For those who do not need so much adrenaline in their lives, and the working day is busy with other activities, we suggest paying attention to collective investment funds managed by professional portfolio managers.
Sharp market fluctuations can alienate those who perceive the purchase of shares as a bet in a casino, not understanding the fundamental characteristics of what they are buying and neglecting the rules of risk management. Smart, long-term investors are not afraid of short-term drawdowns.