What to do when the stock market is down?
We all know and agree that all our investment portfolios are looking little red with consistent notifications that the market is down and maybe you might see the overall returns also negative for the past few months. So let us see what we can do when the stock market is down.
Don’t panic sell:
This is the first thing that comes to mind in case of a downturn in the market. But we could not have guessed this recession even in our dreams as it was because of many reasons like covid, war, and other political & economical issues happening around the world. But selling the stocks when the market is down and buying them when it is up only results in bad returns and is a beginner’s mistake. So don’t panic-sell your stocks because the market is down now. There is something called Dollar cost averaging which I have written more about down below that helps in getting good returns when you consistently invest irrespective of down/up turns in the market. It so happens that down-turns are always followed by upturns if we see history(ex: 2008 recession).
Always think and invest long-term when coming to stocks as you can never time the market. You can invest in options or intraday trading only when your risk appetite is high and ready to lose all or most of the money. In case of a downturn, you can also buy options(“Put”) predicting that it might go lower than the current price. But most experts who were billionaires invest in the long-term. In fact, if you want to see good returns they suggest, you should invest for a period of 20 to 30 years.
This is the right time for you to think of other types of investments than just stocks like Real estate(rental properties), Treasury bonds, cash/cash equivalents, Gold, etc. Gold is a great investment in these times of downturn, you can hedge your investments through Gold coins/trusts/ETFs/bonds, etc. It is a real precious metal available in limited quantity which will grow over time into a great investment. Not just that but you can think of investing in Real-estate ETFs(REITs) or stocks of the companies that are in Real estate. This is the time to grow your knowledge and diversify.
Hedging is a way to secure your investments in the stock market. It is just like an insurance policy against your home or life. You cannot predict market downturns but you can insure against them by buying something called “Derivatives”. This ensures that your stocks are secured but also reduces the potential gains. It comes at a cost. So in short it is like your term life insurance where you pay so that your death doesn’t cost your family’s financial stability but you will not get anything in return while you are still alive. It is just security in case of the worst.
I will write more about hedging in my upcoming article. Stay tuned for it. It is a large topic as it is.
Take advantage of the downturn in the market:
Seeing opportunity in case of a challenge is a smart move. Take the advantage that all the good stocks are now selling low. Use it to your advantage and buy them when they are less instead of panic-selling. As I mentioned above, there is something called “Dollar-cost averaging” which is an average of the stock value at different pricing you buy at whether they are low or high resulting in a positive return. It doesn’t matter if they are low now but if you keep buying they average out to profit when the stock grows over time. More about it in my upcoming articles.
Bonus tip: If you are afraid of investing in a single stock, then try investing in an index/mutual fund or an ETF that tracks all of the S&P stocks. In that way, you don’t have to research a lot and learn about each stock which also gives a great start for beginner investors.
Disclaimer: I am not a financial advisor or a consultant. Please check with a professional before investing your money in the stock market. There might be a risk of losing money when investing in the stock market. It is important to research or consult before investing.
- one-thing-never-do-when-stock-market-goes-down from Investopedia
- 3-reasons-not-sell-after-market-downturn from Investopedia
- Hedging from Investopedia
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Yes, that is a great idea too. You can sell put options too. Thanks for mentioning this 🙂
One other thing I would probably do is sell put options for good value companies. Say you wanted to buy Alphabet(Google) but if it’s at $109 ( mrkt cap 1.4 Trillion). You can sell put option for 95 which may have a premium of 5-10 bucks based on expiry date. That way, you would put 9500 in for option and you would get around 500-1000 depending on option expiry and you can put that money (500-1000) in that stock immediately and wait for option expiry. If the stock hits 85 and the option is executed, you’d get the stock at 85 and as it’s a good stock and good entry point, you’d probably make good returns on longer time horizon and also another case would be if that stock doesn’t hit 85 but stays around 100. Well you’d still have earned your premium of 500-1000 and also your 9500 back. Like I said at first, you’d invest that premium money in that stock for free. Most investors would probably buy call options or put options. But if you are confident on stock but want to enter at a lower price. This approach would be good.