We all knew it was coming. With more than 80% rise in stock price in just 13 months was a strong sign of an unrealistic bubble, which had to eventually burst. So, it was expected.
However, according to economists, we may have to face a double-dip recession, or even a ‘Lost Decade’, which would make the situation scarier. Besides, unstable economic growth in Europe, especially in Spain, Ireland, Portugal, Italy, and Greece is a rising concern. China may face a slowdown in GDP growth and we may see further job cuts in the near future.
Hence, in such situations, after the dreadful crash in 2008 followed by the weak performance in 2009, most may wonder whether another such crash is around the corner. In such cases, you, as an investor, have to manage your risk efficiently and keep your cool. Here is how to do it.
The stock market is volatile, especially in the short run. And during such situations, where the recession is far from over, you cannot expect the market to move calmly and provide profits. You have to get used to price swings and unpredicted movements, say most experts. If you want to invest in the market for the long-term, you have to worry about these swings, even if it lasts for a month or a year. In fact, if you are planning to invest money in this market for 10 years or more, such interim drop is an opportunity.
Past data shouldn’t affect your buying decision, but this is something that will help you understand the nature of the market. Since 1926, most stocks have provided an annual average return of 9.7% with a deviation of 21.4% points.
How Can You Over Come this Fear and Not Panic?
Select Safe Stocks
Many stocks tend to be more volatile than others due to their nature of the business. If you are a first-time investor or want to play a safe-game, stick to companies with decent business and that one that always had steady movements.
Invest in Large-Cap companies that provide above-average returns, and put you through a less bumpy ride. Most of these stocks are an expensive buy. However, when the market plunges, they are ones you must grab first.
Set target Buy/Sell
If you think company XYZ, for instance, is overpriced at $50 and should be traded at $40, set a buy order at $40. Whenever the stock falls below your target level, you will automatically buy them. Similarly, you can place such a filter to sell your stocks.
Don’t Expect Much
Few economists have predicted a ‘Lost Decade’, which means a decade of recession. GDP growth would be extremely slow during the decade, and the increase in the value of your investment would retard.
Stocks have performed significantly in the past. But it doesn’t produce similar results every year. If it provided a 25% return in 2007, it may not even gain 3% in 2010. Hence, expecting higher returns every year is impractical.
Create Income Cushion
You can certainly not expect stocks to perform as they did in past, 2007 specifically. However, you can cushion your income by investing some amount into high-dividend stocks, which will help you earn small but steady income throughout.
Increase Your Savings
Investing $7,200 at 6% for a period of 10 years will generate $100,000 just as quickly as $5,000 at 12%. Besides, you can have total control of your savings investment, but not on market movements.
Look Beyond Immediate Future
If your broker says it’s overpriced, you simply refuse to buy that stock. However, your broker came to this conclusion simply by calculating its current P/E Ratio. But now is the time to depend on projected earnings rather than P/E, as stocks may rise above predicted levels if the economy starts recovering soon. Look beyond the immediate future.
Stocks may or may not perform better. In such cases, it’s imperative to diversify your investment portfolio into various asset categories like bonds, savings account, mutual funds, and so on. However, make sure you don’t invest in the commodities market until you understand how it works.
If you wish to invest 20% of your investment amount into stocks, you should not dump all your money into one stock. Diversify into various categories like banking, manufacturing, infrastructure, and so on.