Investors are facing tough times at the moment – with all the uncertainty and speculation surrounding the coronavirus, Wall Street has just entered a bear market, American indices have lost more than 20% from recent highs, and the impact on the global economy at large is substantial.
History shows that bear markets are inevitable. While no one really knows when downturns will occur, or how long they last, smart investors should embrace them and prepare for the next bull market, instead of trying to avoid downward movements.
So, what are the best ways to go through a market downturn and stay calm when your portfolio loses ground?
1# Think about your financial objectives and stick to your investment plan
When you start investing money in the financial markets, it’s essential first to decide what your goals are, so then you adopt the best trading strategy and stay focused on your trading plan when markets go against you.
If you want to make money quickly, you might focus on short-term, leveraged products. If you’re looking for investment options to prepare for the future, then you might want to look at employer-sponsored plans, such as pension plans.
2# Use tax-advantaged accounts to reduce your tax burden
Among the most popular financial products you can take advantage of to prepare your retirement, the Registered Retirement Savings Plan (RRSP) in Canada or the 401K in the United States are both excellent options with broad tax advantages.
Here is an excellent RRSP calculator Canadians can use to get a sense of how much their savings and investments could be worth over time. If you’re based in the United States, you can also use a 401K calculator. These calculators help you get an idea of the average returns that you can expect over time, as they take into account the ups and downs of the market.
3# Review long-term trends and take advantage of bargain prices
Always put things into perspective, especially if you’re investing in the long-run. Think about reviewing long-term trends and remember that bear markets have been historically shorter than bull markets.
Of course, market crashes are scary, but looking at the long-term trends of the markets can sometimes be enough to calm your fear. Do not forget that for every downturn, there is always a recovery. Viewed this way, a downturn is in fact a good opportunity for you to buy assets at lower price.
Knowing how to survive a bear market is essential if you want to make money over the long-term. But the first rule is to be sure that you only invest what you can afford to lose, as using money you need will add psychological pressure when markets move against you.
Do not panic as soon as you lose money.
Think about rebalancing your portfolio based on the business and market cycles you’re in (Defensive vs. Cyclical values). Diversification can also greatly help you reduce your overall investment risk.
Remember to always take into account your investment horizon, and that you have a plan to follow, so don’t let your fears affect your decision making process.