The performance of the money markets in 2022 was far from impressive. With inflation on the rise and real estate facing significant speculation, various markets experienced substantial setbacks. This includes the S&P 500, a typically used gauge of economic well-being, which saw a decline of 20%.
Among the fear and uncertainty, it's important to remember that markets ebb and flow and will recover, the only unknown is when this will happen.
While the golden rule is to remain level-headed and not make trades based on emotion (primarily fear), we understand that that's sometimes easier said than done. Remain a successful investor despite the market dip by conquering the emotional aspect of trading and getting a better grip on your investment portfolio.
You've assessed your risk tolerance, researched historical market volatility, and built an investing strategy, now tackle the winds of the bear market head-on with these three valuable tricks to avoid making costly mistakes.
3 tips on avoiding costly mistakes during market downturn
Investing in the stock market, or any emerging markets is like riding a rollercoaster, when the markets are down the only ones that get hurt are the ones that jump off. It is often more valuable to hold your investment and wait for the markets to recover (and yes, this may take years) than to liquidate a trade and make a permanent loss.
Consider how long the stock market has been operating and how many bear and bull markets it has experienced. The past performance of market history shows us that it will always correct itself.
1. Don’t abandon your investments
When your retirement account drops in value, it can be tempting to "protect" the remaining funds by selling off high-risk mutual funds or equity securities and moving them into something that is perceived as a "safe option" until the stock market steadies.
However, when investors try to exit the market this way, more often than not they end up losing more money than they would have had they ridden out the rollercoaster.
Remember, investing is a long-term game and requires a certain level of discipline, consistency, and patience. Financial journeys rarely turn to millionaire status overnight and should be centered around building long-term wealth as opposed to overnight success.
Instead of focusing on day-to-day or month-to-month performances, focus on the bigger picture. When the markets rebound and your balances start to reflect this, you will be grateful you left your diversified portfolio intact.
2. Take advantage of the "discount" prices and keep growing your investment portfolio
According to a study by Allianz Life, 54% of Americans have cut back or altogether stopped savings for retirement due to concerns about inflation. While we know investing involves risk, this can be a very costly mistake in the long run.
Consider periods of a market downturn as "sales" that offer shares on the stock market at discounted prices. When the markets are down, the same stocks that were previously being traded for high amounts are suddenly going for much less. "Buy the dip" is a popular investment phrase that encourages investors to buy when prices are down.
If investing when the markets are down makes you nervous, consider the data: historically, stock markets always recover. It might take years or months, but stock prices will return to previous levels, and more than likely exceed these. As will your investment portfolio's balance.
3. Consider talking to a professional financial advisor
While the main aim is to stick to the straight and narrow of fact-based trading as opposed to emotion-based, there is never a bad time to seek professional help when you think you might need it. A professional financial advisor can advise on questions or ideas you might have for managing your portfolio and might offer some peace of mind during dark times.
There's never a wrong time to ask for help, and never feel like you need to brave the markets solo.
Keep your investments on track (stock market and otherwise)
Investing isn't for the faint-hearted, especially when the markets are going through a dip. Consider the 2007 financial crisis for example, it took five years for the markets to recover from rock bottom, and a few more months to reach highs achieved right before the dip.
The markets will always recover, it's how you handle the dips that will determine the success of your investments. If you're ever uncertain, consider talking to a financial advisor who can guide you in the right direction.
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