Investing during difficult market conditions
In the midst of the greatest economic downturn since the Great Depression and because of the overall volatility of the stock market, investors are likely experiencing sleepless nights. During these difficult economic times, it’s important to remember that challenging market conditions can provide smart investors with potentially rewarding investment opportunities.
Reconsider before selling stock
If falling stock prices are causing you to think about selling some of your underperforming stocks, think twice. There are, of course, good reasons why you might want to sell certain positions — if, for example, you’ve identified better investment potential elsewhere or you want to realize capital losses to offset future capital gains.
But if you’re selling only because you’re worried about stock prices falling even further, it’s usually a bad move. When you liquidate otherwise good stocks in decline, you lock in losses with no hope of recovery.
Assuming your investment time horizon is long enough to wait out a downturn, take comfort in the fact that, despite considerable short-term volatility, the market has historically risen over the long term. If your time horizon is relatively short, however, make sure you work closely with your financial advisor to determine the best portfolio mix for your age and risk tolerance.
Search for bargains
When the overall market drops, it takes many different kinds of stocks with it. Sometimes the reasons behind an individual stock’s price drop are rational, such as weaker earnings, management troubles, or a worsened outlook for the future. But at other times, a stock may fall even when its underlying business remains solid.
This can be an opportunity for attentive investors to buy shares of quality companies at a significant discount. If you’re right about a firm’s long-term prospect and its stock begins to rise, you have the opportunity to buy in at lower prices, thereby magnifying your potential for future gains.
Diversify across asset classes
One way to reduce your portfolio’s vulnerability in a weak market is to make sure it’s diversified across a variety of asset classes. This means not only being diversified among stocks, bonds and money market funds, but also within each of these groups.
The goal of diversification is to own some investments that can be expected to outperform while others are underperforming. This can reduce your portfolio’s overall volatility and minimize the negative impact of a market downturn on its value.
Reallocate if necessary
Regardless of market conditions, it’s important to work with your financial advisor to assess your portfolio’s health and determine if you need to reallocate your assets. Be sure to discuss how to best position your portfolio to weather the current economic storm.
Stay motivated to invest
Even the most surefooted investors can find it tough to motivate themselves to invest when markets are declining. One way to overcome this challenge is to invest a set amount of money at regular intervals to take advantage of dollar-cost averaging.
Dollar-cost averaging, by investing the same dollar amount at regular intervals, allows you to acquire more shares when market values are lower and fewer when prices are higher. By investing regularly in a market downturn, you can lower your average cost per share, thus enhancing your gains if your investments rebound.
But for dollar-cost averaging to be effective, you must commit to investing in both good and bad markets. So before enrolling in an automatic investment program, be sure to consider your ability and your commitment to continue to make regular investments. Bear in mind that dollar-cost averaging doesn’t assure a profit, nor does it protect against loss in declining markets.