Do you get nervous when you see your investments dip? Are you compelled to sell off and wait out the storm? There are things you can do in advance to have confidence in your investments. These are reasons why I don’t stress when the market dips.
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Have an investing plan
Always make sure that you have an investment plan when you decide to enter the stock market. Having an investment strategy takes the emotion out of investing. If you have done your research and are confident in your portfolio, a dip in price should be exciting because you have the opportunity to buy a stock at a discount.
Knowing when to buy and sell is a major part of an investing plan. Make sure that you are appropriately diversified so that you are not overexposed to one particular stock. If the stock takes a hit, it is not detrimental to your long term investing goals.
Understand what you are buying
You should have a strong understanding of the fundamentals of any business you decide to invest in. This includes an understanding of their business model and the financial position of the company. It isn’t enough to like their product as a consumer. These are a few things to consider when investing in a stock:
– How much debt does the company have?
– How much cash does the company have?
– What are the long term goals of the business?
– Does the business have a strong leadership team?
– Is the stock price volatile or steady?
– What percentage of net income is the business using to pay out their dividend?
The answers to these questions are all really important things to understand before deciding to invest in a stock. This is why it is important to have a clear investment strategy. Have clear metrics for how many stocks you plan to invest in. Keeping track of all this information with each position takes time and discipline. If you find that you don’t have the time or interest in keeping track of these things, you may be better off investing in an ETF or mutual fund. This way the fund manager handles all of the analysis for you.
Know the numbers
When you enter into a new position, know where your exit point is when you buy it. Most brokers will allow you to set up a notification once a stock reaches a certain price. Another option is setting up a rolling limit order to enter a trade once it reaches a certain amount. If you are concerned about losing money due to the price dropping, this is something you should set up to mitigate your loss. Your exit point should be based on your risk tolerance. You don’t want the exit point to be too high or else you could sell out of a position too early. The stock could recover and you could miss out on an opportunity. If you sell too late, you could incur deeper losses.
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Never invest more than you can afford to lose
You should never put more money into the market than you can afford to lose. Make sure that you have an emergency fund in place and have other assets you can pull from other than your stock portfolio during hard times. If you don’t have an emergency fund in place you may have to take money out of your portfolio while the market is down. Pulling money out of the market while it is down is the worst thing you can do. By selling low you are guaranteed to incur losses.
Remember that there is a difference between savings and investments. Both are important but have different objectives in your overall financial portfolio. I have seen people dump all of their emergency fund into the market while it is down because they don’t want to miss out on a buying opportunity. This is a very risky thing to do. By doing this they put their safety net on the line. If you are afraid of FOMO, allocate some money outside of your emergency fund for huge deals in the market.
Don’t let your emotions get to you when investing. This is why having an investment strategy is so important. It provides a roadmap for your portfolio and takes the emotion out of the process.
Sometimes it just takes experience
You never really know how you will react when the market dips until your money is on the line. Sometimes you just need to experience a major dips once to be able to stomach it again in the future. Seeing a sea of red when looking at your portfolio is difficult and you will be tempted to sell. Don’t do it. Unless you have information that causes you to lose confidence in the business, wait it out.
Be willing to wait it out
The worst part of the market dropping is the unknown of when it will go back former highs. It could take a few days, months, or years for the market to bounce back. The unknown makes people fear that it could go even lower and then they have concerns of never recovering their investment.
This is when some basic technical analysis can be very helpful. Look at the trend of the stock over time, keep track of their quarterly earnings reports. If these signals are improving, you will feel better about holding the stock while it is recovering. If you find that it continues to lose value, refer to your investing strategy and determine when it is appropriate to cut your losses.
Buy strong stocks on sale
If you are confident in your portfolio, dips in the market should be seen as an opportunity to load up. People are often nervous when the market goes down. This often leads to people selling their stock which pushes the prices down further. The market is pricing in consumer sentiment but that doesn’t mean that is the true value of the stock. Run your numbers, look for companies with strong ratios and opportunity for growth.
Stock prices can fluctuate based on a market issue or the news of the day. If you know your numbers and do your due diligence you should be able to have more confidence when your stocks take a dip in price.
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
