The stock market can deliver incredible returns for investors, but not without a few inevitable downturns! If you’re new to investing, it can be quite a shock when stock prices start falling. However, declines are completely normal. Ups and downs are all part of the process.
The question is, how do you handle this volatility? In this article, we’ll explain how you can invest without panicking. We’ll also introduce you to a strategy called dollar-cost-averaging, which helps you take advantage when the market drops.
What to do when prices fall
- First of all, remember that investing is a marathon, not a sprint. We’re here for the long-term, so try not to get distracted by the day-to-day movements of the market.
- Stay focused on your long-term vision and maintain a well-diversified portfolio.
- History shows that the world economy has consistently grown up to this point in time. If you zoom out and look at the MSCI world index from 1978 to the present day, you’ll see the line has always risen over time. Of course, there are peaks and troughs along the way, but the overall trend is clear.
No returns without volatility
If you’re new to investing, this volatility is completely normal. In fact, price fluctuations are an important part of the process. On the stock market, you need opposing market forces with different participants willing to pay different prices. It’s a game of supply and demand, and it requires volatility and variance in price. Without this mechanism, there would not be a stock exchange, and therefore no return.
Investing is about diversification and persistence
Let’s zoom out and look at the MSCI index again. This is the perfect example because it’s made up of 1,546 stocks from 23 developed nations (as of December 31st, 2021). This index is incredibly well diversified across many sectors and geographic regions. Over time, it has grown steadily over the last 44 years, since 1978. The index therefore tracks the global economy quite well.
History shows that the world economy has grown over time and the trend is likely to continue. As an investor, you can tap into this by diversifying your portfolio. If you spread your investments across many companies, industries and countries, you can smooth out the volatility. Even during a financial crisis or stock market crash, it’s unlikely that all your investments will be affected at the same time. For example, travel stocks suffered during the Covid-19 crisis, but tech stocks soared as everyone began working from home. If you had a balanced mix, it would smooth out the volatility.
And even if there’s a broad downturn in the market, there are opportunities to be found. We’ll explain how in the next section.
Peaks and troughs are completely normal for investors. However, it’s very difficult to time the markets. Even the best investors can’t do it perfectly! Instead, you can keep it simple and use the dollar-cost-averaging strategy.
How does it work? Rather than trying to time the market, you simply invest the same small amount at regular intervals, such as monthly or weekly. With this strategy, you will, of course, buy some of the peaks when stocks are expensive, but you’ll also buy during the dips when stocks are relatively cheap. Over time, this strategy gives you an average purchase price for your investments. This way, there’s less risk of losing money, and it’s a proven strategy to grow your wealth over the long term.
A dip in the stock market is therefore a good thing for long-term investors. With dollar-cost-averaging, you’ll buy more shares for your money during the dip. Experienced investors buy when the prices are low, so they can profit if they rise again.
Keep your cool and stick to your investment plan
If you can keep your cool during the peaks and troughs, you may outperform the investor who panics and over-reacts to news. Try to think of stock market dips as buying opportunities for your long-term strategy. Once the stock market recovers, those who bought will be happy.
Remember that, sooner or later, all investors will have to deal with turbulence in the stock market. It’s important to stay calm, follow your investment plan and focus on your long-term goals. It’s about where you want to be in five, ten, twenty years or even longer.
All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.