I must admit that in volatile times its really a difficult call to make- whether one should buy, sell or hold stocks? The real problem is that we get too emotional and react to market ups and downs, but the market pays no heed to any emotions. When the stock market enters a dusty patch, I keep telling myself to stick with my initial plan, but at times emotions make me unsettled and I religiously follow what the DOW, NASDAQ and S&P moves make me do. As of now, global economic woes are nowhere near over may it be US Debt, Euro zone Crisis, or the rising inflation and slowing growth in emerging markets. So what is the ideal investment strategy for such times? Is it time to make alterations to your long term investment plan? Or simply, you should sell out of stocks and wait for the markets to stabilize?
All of us ‘investor’ live though different situations, our investment goals vary, so what I share in this post may not hold true for everyone reading this, but there are few things that might prove helpful.
Ignoring short term volatility and sticking on to your long term investment plan is a classic strategy that works out just fine. You don’t have to look deep down the history pages to figure it all out. Markets have recovered every time after a collapse since the 2000 tech bubble crash, although this time recovery is still in process. Now, just imagine that you had panicked and sold out your holdings in each of these crashes and then waited for the market to get back on its regular functioning, you would certainly make hefty losses. But, if you had kept calm and held on to your positions then you would be doing just fine. Some of your investments may not have fully recovered but then some might have outperformed. Also, you cannot ignore the dividend income in all these years. So, selling is out of question in turbulent times as it increases your risk of buying higher and selling cheap. I know it is difficult to hold on to loss making investments but that’s the way it is with stocks.
Sudden market crashes are the part of the regular functioning of the stock markets, so your key objective should be to design a portfolio in such a manner that your losses can be minimized. Portfolio diversification is not just restricted to broader investment classes such as stocks, bonds, CDs, precious metals and real estate. Within stock investments you should ensure that you make ample diversification by picking up stocks from different industries, countries, and of different sized companies. Doing so will help you weather some market turbulence.
As you should know that during a market downturn even stronger stocks fall along with the weaker ones, so rather than selling to cash you should weed out the weaker investments and build positions in strong names which are still available at bargain prices.
Also, do not forget that your risk exposure is in line with your risk taking capacity. Bullish times might lure you to invest more in stocks, but you should ensure that you only take the risks that you can handle. Cash investments and bonds make up integral part of your portfolio and you should allocate resources accordingly.
Here, it is important to note that just because your risk taking ability is higher, it’s not compulsory that you should. Keep your investment objective in mind and invest in a way to achieve while taking minimum risks.
You might still want to do something about your investments than holding on to them in volatile markets. This is natural human tendency, but what are your options out there? Amid ongoing volatile phase you simply cannot make a switch to cash investments which are yielding rock-bottom return rates.
My personal advise to anyone who can hold on to their stock investments for a longer term would be to stay put and ride the storm as who knows the blue sky is around the corner. Just keep ample cash to phase out another year or two of market volatility.
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