Stocks on global exchanges have continued to plunge lately. The main cause is the latest Coronavirus or COVID-19 outbreak which has an impact on the global economy. Reported from Antaranews, Wall Street shares even had a 'free fall' to more than 12 percent.
This was triggered by market fears of an increasingly widespread Coronavirus outbreak. Although condition like this is certain to improve, but no one can be sure when the condition will be back to normal.
When the stock market goes down, it's not easy to measure and value a portfolio, while you don't do anything. However, if you invest for long term, doing nothing can be the best way. Nerd Wallet once wrote, the market only takes about 13 months to recover losses after a massive sell-off that occurred in 2015.
Long-term investment is considered better, because if you sell the entire investment when you experience a loss, you will actually lock in the level of loss. It could even be, you will pay more if you return to invest when the market improves. The reason, stock prices will continue to rise when the market condition is good.
Market history proves that it is better to take advantage of double digit declines than to decide too quickly to sell all investments. Although there is a risk of further decline, the possibility of the market not falling further is bigger. Here are the things that investors can do when stocks plummet in the midst of Covid-19 outbreak.
1. Don’t Panic
First things first: Do not panic! While you may freak out and consider taking all of your money out of your bank and hiding it under your mattress, this likely isn’t the wisest idea. Likewise, neither is immediately selling off your investments to avoid the volatility of the market. Why? Because if the market can crash, it can go up again.
According CNBC, if you invested in 2008 — instead of panicking — you’d be doing fairly well right now. The CNBC article states:
“In the 10 years since the crisis got rolling, the Standard & Poor’s 500 index has returned 7.8 percent, annualized, including dividends. That’s not far below the very long-term average yearly return of just under 10 percent. So a very unlucky investor who climbed into equities as they were about to careen off a cliff hasn’t been hurt too badly. A standard portfolio mix of stocks and bonds, as reflected in the Vanguard Balanced Index Fund, has returned a decent 6.8 percent over the same span, with roughly half the downside volatility experienced by the S&P 500. Clearly, the passage of time in the markets can help make up for bad timing.”
2. Cut Back on Spending
How much do you really need to live off of? Look at your budget and evaluate areas where you can cut back. You can figure out where you can do this by looking at your bare-bones budget.
Why do this? Because if the stock market crashes, you may need to be a bit more frugal while you wait for a rebound. Figure out how much money you need in order to pay all your bills. Once you have your budget set (rent/mortgage, food, etc), you can look at the areas that aren’t essential and start to cut back. From there, you can figure out how much you’ve got to spend and how much you can save.
3. Boost Your Savings Rate
A stock market crash can have a ripple effect on other areas of your life. For example, you may get laid off from your job, have limited access to credit or have a tough time getting clients. For these reasons and more, it’s important to be prepared and have cash saved up.
Experts recommend saving three to six months of expenses in an emergency fund, but you might want to boost that up to 12 months. While this may take some time, there’s no harm in starting to save more as soon as you can. With beefed up savings, this will help you weather a storm if the stock market should crash.
4. Assess Your Risk Tolerance
Investing is never a risk-free endeavor. When you’re just starting out, it’s important to determine your risk tolerance, as well as a strategy to grow your money over time.
What’s risk tolerance? Risk tolerance is how much risk you’re willing to deal with when investing. So, ask yourself this question: Are you an aggressive or conservative investor?
You may also want to consider any lifestyle changes that may affect the amount of risk you can take on. For example, are you preparing to have a baby, get married, go back to school or going through a divorce? Perhaps you’re dealing with a layoff or you switched jobs and took a pay cut?
Your risk tolerance, as well as these lifestyle factors, should be considered and you can adjust your investing strategy accordingly. For example, perhaps you can move away from a stock-heavy portfolio if having too many stocks makes you skittish. Or, perhaps you can put more of your money into savings. The key is to be diversified in a way that makes sense for you – given your risk tolerance, lifestyles and goals.
5. Buy and Hold
A good strategy in an uncertain market is to buy and hold. So what exactly is that? Buy and hold is when you buy stocks and just hold onto them. You don’t try to play games or get into a situation you’re not well-equipped to deal with – such as trying to time the stock market.
The ultimate goal with investing is to build wealth, and this takes time. Think of your investments as a long-term play and this way you won’t be so stressed about the possible day-to-day volatility.
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