In 2022, there is a lot of talk about the crisis and recession. Everyone feels that something is wrong in the economy - the costs of habitual purchases have increased and, perhaps, what they have been saving for for a long time has become significantly more expensive. In addition, many economically active people are also private investors. Moreover, a significant increase in the number of investors occurred in the last 2 years, when deposit rates were not pleasing, and investments in the stock market showed impressive results. After the growth of stock markets in the post-crisis period, 2022 has become a real test for investors. First of all, for beginners who have just joined the ranks of investors. Pros could also face certain emotional difficulties.
The stock market and the quotations of individual stocks can not only rise, but also fall. This is an axiom. Sometimes the drop can amount to tens or even hundreds of percent. Often investors do not understand what to do when quotes and the amount on the account "melts before our eyes". In this article, we, as practitioners whose investment portfolio has gone through a lot since 2015, but at the same time has shown and is showing decent results, will share our experience. We will tell you what is worth and what is not worth doing during the fall of the markets. Perhaps for someone these tips and recommendations will become a soothing pill when the first panic attacks appear.
Calm, only calm!
It is important to maintain psychological calm in a crisis, and it is doubly important for an investor – this will help avoid impulsive actions in the market, which you may regret later. There are a few simple rules that a reasonable investor should definitely not do
Do not cook in the flow of negative news
In the modern world, for most of us, the main source of news is the Internet. One has only to click on the title on a certain topic once, the search engine will immediately helpfully fill up the feed with such news. The most "clickable" news is negative, so it is not surprising that the reader of the news feed turns out to be an unwitting prisoner of the flow of negative information. The same principle works for the media – of all the events, journalists are more likely to talk about tragic ones or thicken the colors by placing the right accents. What can we say about the Internet or the philistine media, if even professional publications "sin" like this? You can even conduct an experiment by entering the query "crisis", "recession", "market collapse" and so on in the search engine. It turns out that everything will happen literally tomorrow, and you are not ready yet.
It is important to understand that the objective picture of the world is often different from the one that is formed from the news. In addition, there are always more negative messages in a crisis, periods of falling markets, and due to the peculiarities of modern media, they usually fill the news feed. Do not read the news too often - it can cause constant background stress. Therefore, one of the important psychological qualities of an investor is to be able to emotionally distance himself from bad news and remain calm. It is a calm and balanced state that will help you not lose your way and follow the chosen investment strategy.
Of course, it is impossible not to be interested in what is happening at all. Moreover, in the modern information world, important information obtained from reliable sources can help you make the right decision in time. Therefore, it is important to set up your sources of information in such a way as to weed out the unnecessary and not miss a really important event in the stream of momentary sensations.
Do not look every hour at the changes in quotations, remember about long-term investment
Of course, an evergreen portfolio is fine. However, stocks cannot always show growth – their peculiarity is that they never grow in a straight line, although in the long term the market is always growing. The investor should be prepared for the fact that some stocks in the portfolio are growing, some are falling. In a crisis, all stocks can fall. But the stock market, like the economy, is cyclical: a crisis always gives way to a boom, and a period of growth is followed by a recession. If we choose fundamentally reliable assets in the portfolio and are confident in our choice, the momentary market conditions cannot plunge us into panic.
If we look at the dynamics of the market over the past 30 years, we will see that there have been both corrections and collapses in history. The reasons and the depth of the fall were different, but what was the same was that any market decline ends, and recovery follows.
Read more: Recession in the US in 2022
Don't be afraid and don't panic
The stock market and the economy as a whole are developing cyclically. Periods of boom and recession have followed each other throughout the history of mankind. Of course, a lot of things collapse in a crisis, and even stable, well-developing companies may experience difficulties. However, you should not succumb to the influence of the crowd and panic, even if everyone around is just talking about the crisis. You will say it is very difficult. Indeed, it is not easy to resist when, for example, all stocks fall by 20 or 30 percent. The only thing that can be contrasted with emotions is reason. When a person reasons logically, emotions recede into the background.
The Council. It is important to maintain the ability to reasonably assess what is happening. Knowledge of the basics of investing and financial literacy and the ability to apply them in practice will help to preserve the accumulated capital.
Be critical of investment advice
What is most interesting, both experts and people who are far from investing can give advice. A separate category in the advice section is bloggers' advice. Currently, bloggers write and shoot videos about everything that subscribers read and watch, not counting explicit advertising. Investments are popular. Please, there are plenty of gurus on the Internet who give out content about investments every day. There are two main trends in the information flow of bloggers, which are better treated critically, especially in a crisis:
1. It is profitable to invest - not for an ordinary person.
Bloggers often write that only large investors can make good money on insiders and gray schemes at the expense of inexperienced "hamsters". What is the interest of such an author, it is clear – articles and videos with revelations always collect more views. And a novice investor wants to avoid mistakes. Someone has already burned themselves on financial pyramids and similar scams and is starting to look for what the catch might be in investing. Especially a lot of such "sensational" materials appear in times of crisis – everyone is worried about the future, and in a crisis it is as vague as ever. Therefore, bloggers write about conspiracy theories, subscribers are disappointed in the possibilities of the stock market, merge existing assets at any price and leave the market.
The Council. If you sometimes find yourself reading another revealing article about conspiracy theories in the stock market, it is better to devote this time to learning the basics of investing. This is the only reasonable way out – it is fundamental knowledge that provides a solid foundation and helps to gain confidence in their actions. It is important to choose professional training in the basics of the stock market, investments and financial literacy, because there are also a lot of training offers.
Read more: How to participate in an IPO
2. The second topic frequently encountered by bloggers is tips on which securities to invest in.
Such materials also collect a lot of views. Consulting an independent financial analyst is expensive, and bloggers give out advice for free – and the investor shifts responsibility for the final decision from his shoulders to the blogger. This is a common psychological trap of a novice investor: to look for someone who will confidently recommend what you can invest in profitably. Of course, bloggers argue their choice one way or another, without this, the recommendations would be completely unconvincing. In addition, it cannot be said that advice on the Internet is useless – perhaps there is a rational grain in them. But in order to separate really professional advice from populist statements for the sake of views and likes, it is necessary at least to understand the basics of investing. Today it is available to everyone. Moreover, investment literacy is currently a vital skill, as relevant as the ability to drive a car, for example. It is necessary to be clearly aware that only we ourselves are responsible for our investment decisions. The blogger got the right number of views – and has already earned. It does not matter to him whether those who used the voiced investment will eventually earn.
The Council. It is necessary to develop at least a basic level of expertise in investments in order to be able to adequately perceive information flows from different sources. And of course, to minimize the flow of unprofessional information is not to read or watch bloggers who give out daily content for the spite of the day for the sake of views and likes.
What not to do when markets fall
Above, we tried to understand what behavior in everyday life is best avoided by an investor in order to maintain calm and the ability to rationally treat a crisis situation. However, even if the above recommendations are followed, it is worth remembering that in no case should you do on the stock market in a crisis.
Read more: How to make money in crisis
Do not sell shares on emotions
When everything is falling, it may seem like a reasonable decision to save at least something and sell the shares right now. Objectively, this may mean fixing losses. Any investment decision should be balanced, and in a crisis – doubly so. It is important to conduct a fundamental analysis of the portfolio once again. If the company retains its potential and continues to develop even in a crisis, do not sell, but, if possible, average the position.
Do not violate the rules of diversification
In a crisis, even fundamentally attractive stocks can be very cheap. Investors are tempted to buy the paper they like for a large share in the portfolio. However, no one guarantees that the selected stock will recover or even increase in price, that the company will successfully cope with the crisis. In a period of uncertainty and high risks, it is more important than ever to diversify investments as much as possible so that the possible fall of one asset does not drag down the entire portfolio.
We are talking more about stocks now - they attract everyone's attention in times of crisis. Of course, a balanced portfolio should also include bonds and, possibly, other financial instruments. You can read more about the diversification of the investment portfolio here.
The same principle also applies to property as a whole: it is in a crisis that the temptation is great to shift capital into shares in the hope of profitably acquiring cheaper assets.
Do not bring "last money" to the market
All crises end sooner or later. However, this may not happen tomorrow or the day after tomorrow. In no case should you invest money in stocks that you may need in the near future, even if the price seems very attractive. Recovery after the crisis may take several years, and during this time the invested funds will be "frozen".
Read more: Diversification of the investment portfolio: definition & methods of implementation
Do not buy assets without fundamental analysis
As much as an inexperienced beginner wants to sell everything on a wave of panic, so much more sophisticated investor in a crisis wants to buy as many shares as possible at an attractive price. This is another extreme that can trap investors during a crisis. Of course, it is worth taking advantage of the opportunity to profitably acquire good assets, however, first of all it is necessary to adhere to the principles of reasonable investment. In times of crisis, fundamental analysis will help to protect against buying unreliable assets. It is important to analyze and understand whether the selected company will be able to survive the crisis, and only after that plan to buy shares.
Do not expect that the market will grow tomorrow
Uncertainty at the moment is characteristic of the stock market as a whole – you can never predict for sure the further movement of quotations. In a crisis, the volatility of securities is even more unpredictable: when it seems that the bottom has been reached, the fall in stocks may continue (remember the well-known investor saying "To buy at the bottom - the second bottom as a gift"). Conversely, when an investor expects a further decline in prices, a market reversal may occur.
Do not use margin deals
In times of crisis, investors are tempted to bet on rapid growth or vice versa, on the continuation of the fall in quotations, and conduct transactions with leverage for a significant amount for the portfolio:
- borrow shares from a broker and sell them now (a "short" transaction) in the expectation that the price of the paper will fall further, and it will be possible to purchase it at a lower price and return it to the broker;
- borrow money from a broker and buy shares now (long or long position long sale) in the expectation that the price of the paper will rise, and it will be possible to get a positive difference after its sale.
Leverage multiplies the result of the transaction - the investor can significantly increase profits or losses compared to the result that he could get from the transaction at his own expense. Of course, borrowed funds are provided by the broker at a certain percentage. Transactions with leverage are risky, they must be treated with the utmost care. Especially in a crisis, margin transactions can be a "disservice" to the investor. If the trend is guessed incorrectly, a large volume of margin transactions can lead to a margin call, that is, to the forced sale of assets by the broker to repay the debt on margin lending. The sale will be carried out at the market price at the time of sale, which may be unprofitable for the investor. Therefore, it is absolutely not necessary to use margin transactions in a crisis in the expectation that the market will grow or fall in the near future.
Read more: Leverage on the stock market
Conclusion
In this article, we have considered a few simple recommendations that will allow an investor to save capital in a crisis.
To maintain emotional calm, you need:
- Do not cook in the flow of negative news.
- Do not look at the price changes every hour, remember about long-term investment.
- Be critical of investment advice.
- Don't be afraid and don't panic.
There are also several principles of reasonable investment, which are especially relevant in a crisis:
- Do not sell shares on emotions.
- Do not violate the rules of diversification.
- Don't bring all the money to the market.
- Do not buy assets without fundamental analysis.
- Do not expect that the market will grow tomorrow.
You can learn to be calm in a crisis situation, you can take financial literacy training and gain a certain level of expertise in investments. However, the stock market in a crisis is fraught with some temptations that can even encourage a relatively experienced investor to violate the basic principles of reasonable investment. Therefore, in order to preserve capital in turbulent times, it is necessary to strictly observe the principles given in the article. Only by understanding how to prevent the loss of existing wealth, you can move on to the next step – to increase capital.
Read more: Basic knowledge of fundamental analysis
As you know, in a crisis, many assets are very cheap. Therefore, the famous phrase of Winston Churchill is the best fit for reasonable investors: "Never let a good crisis go to waste." However, the choice of reliable assets is a separate topic to which more than one article can be devoted. You can read a lot of articles or blogs about reasonable approaches in choosing reliable and promising securities, and it's better to see and hear.