If you have a strong stomach, then now could be the perfect time to set up your share portfolio for a win when the market recovers. Admittedly, a market recovery is not guaranteed, but a glance through history shows that there have been many occasions when the world, and the stock market, has gone through “interesting times” – and come back fighting.
You may need a strong stomach to cope with downward plunges and volatility
While predictions are always dangerous, it’s hard to see how any stock market could escape downward swings and volatility over the foreseeable future. The whole world has COVID19. Hopefully, this has now peaked and any further waves will have less of an impact but, as the old saying goes, hope is not a strategy. Then there’s Brexit in the UK and a Presidential election in the U.S.
In short, while the stock market can offer excellent gains over the long term, it may not be a place you want to be in the short term. If you are nervous about putting your capital at risk or just don’t feel like you can cope emotionally with what the immediate future may bring for the market, then now may be the time to pack your metaphorical bags and head off to look for alternative options until some level of stability returns.
Why long-term investors see bear markets as buying opportunities
There are basically two reasons why any given company’s share price might fall. The first is that investors consider there to be an issue with that company. That judgement might or might not be fair, but it is, at least, specific to that company. The second is that the market, as a whole, is falling, and, just as a rising tide floats all boats, so a falling one sinks them.
This means that sometimes, companies see their share prices falling, not because there is anything fundamentally wrong with their business, not even because their business itself is clearly suffering from the effects of an economic downturn, but because of what might be called the mechanics of the stock market.
For example, if the stock market as a whole is sinking, then a company may start to look overpriced in comparison with other options, even if, objectively-speaking, its price is a perfectly fair reflection of both its assets and its prospects.
Alternatively, a major investor may decide to “dump” a lot of stock, not because there’s anything wrong with it, but because they need the cash or because they need to rebalance their portfolio (or for a number of other reasons).
Alternatively, investors who only look at headline figures, such as cash at hand, may see that a company’s cash reserves have been diminishing, but miss the fact that the company has been using the downturn as a buying opportunity, possibly even to buy back its own shares.
In short, therefore, astute investors may see stock market downturns as great opportunities to pick up solid companies at bargain prices and reap the rewards when the market returns to normality.
Keep calm as you carry on
Regardless of whether you are investing in a bear market, a bull market, a volatile market or anything in between, your approach should always be to make mindful decisions, in a calm matter, keeping your investment goals in mind at all times.
It’s fine to change your strategy if you feel that is appropriate, just as long as you have a clear rationale for doing so. It’s also advisable to give a strategy a fair chance before you decide whether or not it needs to be changed.
Also, keep in mind that the more you trade the more you will pay in costs and the greater your tax liability may become. This is another, very compelling reason, to resist any temptation to chop and change your investments through panic (or for any other reason).