When stock markets shed percents we’re used to see only in volume discounts investors tend to panic. This phenomenon is as undesirable as it is understandable. A very basic principle of investing is too hold for the long term. However, holding on for the long term is difficult enough with out having to watch your portfolio shrink away.
When markets drop the majority of household investors tend to act quickly and irrationally. Immediate action is sometimes required. But that is not often the case. Household investors, in fear for their savings, are very quick to sell under-valued stocks to the market sharks circling around.
Before taking action I believe we should ask ourselves these following questions which will help us cool our heads and maybe cut the vicious circle of buying high and selling low:
#1 Has there been any fundamental change?
Stock markets tend do let our some air from time to time. Especially after long periods of positive returns. Before taking hastily decisions ask yourself if the market is experiencing fundamental change?What exactly is the nature of the change? Does this change affect your investment portfolio? How?
#2 Have my reasons for investing in a particular stock changed?
Surely you’ve had good reasons to invest in a certain stock. Re-examine those reasons before acting. Has any of the reasons changed? Has the company’s growth been compromised? If the economic slowdown expected to affect sales and revenues? How has the company performed in recent recessions?
#3 Why am I reverting from my original investment strategy?
If you’re investing and not gambling surely you have an investment strategy with detailed goals and prospects. Why have you decided to change your investment strategy? When we invest for the long term we know for sure we will see some rainy days. Why are we surprised then? Ask yourself what has caused you to change your investment strategy and what new strategy are you adopting now?
#4 What are the reasons for the action I’m about to take?
If you’ve decided to change your investment strategy you should be able to answer this question. If you’ve decided to sell your entire portfolio then you must be expecting a full blown market crash. Are you? Maybe selling half of your stock holding would enable you to minimize your risk, hold on to some of the return you’ve been able to achieve and maybe help you get back on the horse when thing brighten up? Would you change your strategy if stock prices were on the rise again?
#5 Should I be actively managing my investments?
Actively managing your investments is a tough job. The psychology of investing is not easy to deal with. Especially if it’s your own money at stake. Professionals exist for a reason.
1. What to shop for in the stock market in times of recession
2. Diversifying your investments over time
3. Long term investing isn’t always a smart move
4. Buying a stock? Keep in mind someone else is selling…
5. Understanding the difference between investing and gambling
More on investing in a bearish market:
1. Secret to value investing: Ignore market noise @ Seeking Alpha
2. Investors are panicking. Great time to invest @ Wealth Weekly
3. My investment philosophy @ the money gardener
4. How I stomach the market’s bumpy ride @ Millionaire Mommy Next Door
5. Five Reasons To Be Optimistic If We Fall Into A Recession @ Money Crashers