Stock prices may fall, but resist these temptations at all costs
If you’ve checked your portfolio in 2022, you know it’s been a tough year for stocks. Overall, some of the top companies and most followed indices have seen their stock prices fall well into the 20% to 60% range, wiping out many of the gains they saw during the mid-to-mid bull market. -2020/2021. Even if stock prices are falling, you will want to resist these temptations at all costs.
1. Panic Selling
It’s easy to see your investments go down and want to sell them before they go down further, but that’s usually not the best approach. Stock market volatility and bear markets are inevitable; they have always happened, and you can bet they will continue to happen in the future. If you understand this as an investor, you can prevent yourself from panicking when this happens. If you’re focused on the long term – which you should be – and time is on your side, you should be comfortable weathering the storm.
Panic selling can also add insult to injury by triggering a tax bill. If you’ve held an investment for less than a year, you’ll pay your ordinary capital gains tax rate. If you’ve held it for more than a year, you’ll get a special rate on capital gains, but it’s still taxes and money owed. You don’t want to end up selling because prices go down and you have to pay extra taxes.
2. Stop investing
For me, keeping your eyes on the price of investing means focusing on the long term and not letting short-term events trigger irrational decisions, like stopping investing. It’s easy to want to stop investing when prices are continuously falling. After all, why buy now when prices will be lower later? The problem is that you don’t know how far prices will go down or if they will suddenly go up, and you don’t want to find yourself trying to time the market.
As prices fall, you need to stick to your investing habits. Rather, consider it a chance to get some of your favorite investments at a “discount” and lower your cost base. Reducing your cost base now will increase your profit potential whenever you sell your shares in the future. Instead of stopping investing, consider increasing it a bit if you can afford it.
3. Focus only on individual businesses
One of the best ways to protect your portfolio during market downturns is to have some diversification. This helps diversify the industry, company size, and global location of your stocks. It is a difficult task if you only invest in individual companies. You will need to research the industries as a whole and then research the many companies in that industry to decide which investment is best for you. And it’s even more difficult when it comes to international businesses because there are other factors you need to consider, such as the economic and political stability of a country.
The best way to achieve diversification is to use index funds because they allow you to invest in many companies at once. There are index funds like the Russell 3000 that track the entire US stock market, funds that focus on companies of a specific size, such as the S&P500and funds that focus on specific sectors, such as Nasdaq Compound. Using a combination of index funds can ensure you achieve diversification in your portfolio.
4. Use emergency funds to buy the dip
It’s common to hear people encouraging each other to buy the dip whenever stock prices fall. Buying the dip can often pay off when (or if) stock prices start to rise, but you want to make sure you’re using the money you’ve already allocated to investing and not dipping into your emergency fund – which should be at least three to six months away – because you see a “must have” opportunity.
It’s easy to think that you can dip into your emergency fund and replace the money later, but there’s also a chance that an emergency will happen before you can. Hopefully an emergency doesn’t happen and you can replace the money, but this can set a bad precedent and should be avoided. Your emergency fund is for exactly that: emergencies. Investment opportunities may seem lucrative and too good to pass up, but they don’t have to put your emergency fund at risk.