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When the stock market is falling, it is only natural that you feel devastated and think of pulling money out of the market to retain whatever is remaining. Instead of panicking in this situation and making decisions in a haze, get the advice of your investment advisor.
You need to understand your risk tolerance and how price fluctuations can affect your investments. This is where diversifying your portfolio can build immunity to your funds. In other words, holding a wide range of investments can make your investments balance any kind of market fluctuations.
Does that mean you have to stay invested even if the market is falling? Let us find out the answer to this question by analysing what experts do during a market downturn.
Top investors choose to put extra cash payments on hold when the market is falling rather than pulling out the already made investments. Instead of continuing with the regular investment patterns, they stop investing for a while and hold on to the cash as it is until the market is ready for investments again.
The profit you make when the market revives from the crash will, then, offset the losses you had held onto throughout the fall.
Selling all your investments when the market is falling may not be the right move. Such a move can result in missing out on huge gains when the market bounces back.
Instead, experts analyse their portfolio’s risky sections, such as those with a history of volatility, high beta, or a new business model, and sell out these stocks to reduce the risk. Holding on to stable investments in established companies can pay well if you can put up until the market gains strength again.
When the market looks unwell or unstable, experts move their funds into alternative options, such as fixed-income investments. The price of fixed-income investments, such as bonds, move inversely with respect to the stock prices. That means the stock market falls and fixed-income investments rise.
Only in the event of a large market downturn does the price of both these entities fall together, though their yield increases.
Experts advise to follow the strategy, ‘Dollar Cost Averaging’, where you invest a designated amount every month. When the market is in full swing, you can only buy a few shares. When the market is falling, you will be able to buy more shares for the same amount of money. In the long run, this strategy can lower the average price per share of the shares you own and can fetch huge gains when the market regains traction.
Though these suggestions are still inclusive of some risk, there are still chances that they pay off. When the market stands up again, you will get to witness the fruits of these strategies. Irrespective of which strategy you follow during a market downturn, a slow and smart approach will lead to good results.