Unless you’re very new to the stock market, you’ve probably already experienced some market turbulence. During the run-up to Brexit, news related to the topic routinely made waves in the markets.
You may not, however, have experienced a prolonged slowdown or recession. With that in mind, here are some thoughts on how to keep calm and carry on investing.
Stabilise your immediate position
The key difference between investing and saving is that investing puts your capital at risk. In theory, you can lose all of it. In practice, it’s more likely that you’ll lose some of it if you have to sell your shares during a difficult period. Either way, you’ll find yourself worse off than you would have been if you hadn’t overcommitted in the first place.
This means that your immediate priority should be to double-check that you have accurately judged your level of investment capital. If you haven’t and you’re already in the stock market, then you need to adjust your portfolio accordingly. You should generally do this as soon as possible to give yourself as much room to manoeuvre as you can.
When considering how much investment capital to afford, think very carefully about both your actual and potential expenses. If you’re planning to use insurance to mitigate certain risks, make sure that you have the right cover at the right level. This is probably going to mean checking the fine print carefully.
Reassess your portfolio to see how well it still fits your goals
At a basic level, investing during a recession is the same as investing at any other time. You set your investment goals and then look for investments that fit those goals. At the same time, you do need to think about the implications of a slow economy. In other words, you need to think about whether or not your investments have what it takes to survive until the good times return.
The less confident you are in your investments’ prospects, the more you should consider adjusting your holding downwards. This doesn’t mean that you have to offload your shares completely (although that is a possibility). It just means that you will aim to set a level you can hold comfortably so you make any sales at once. This minimises transaction charges.
On the flip side, if you are comfortable with holding a stock over the long term, then a slowdown could provide you with a great buying opportunity. Economic slowdowns can bring down the share prices of healthy companies with great long-term prospects. This means that there can be opportunities to grab bargains.
Be prepared to tune out most stock market news
Once you have made any necessary adjustments to your portfolio, be prepared to tune out from the stock market and its news. Again, this doesn’t need to mean that you ignore it completely. It means that you need to avoid letting the emotions of the marketplace lead you to emotionally-driven investment decisions.
When slowdowns and recessions hit, there is a strong tendency for stock-market news to be negative. For example, earnings are low, dividends are cancelled and some companies file for (some form of) bankruptcy. You cannot let all this doom and gloom scare you into making knee-jerk decisions.
Instead, monitor the news that relates specifically to your investments and put it in context. You can and probably should expect your investments’ performance to be, at best, lacklustre. It may even turn out to be worse than you expected, in the short term. What you need to know, however, is whether or not the investment is still valid over the long term.
Similarly, be careful about committing a lot of money to day trading or strategies that require you to time the bottom of the market. It can be fine to put a little of your investment capital into them. Just remember that these approaches often carry a lot of risks.
The value of your investments and any income from them can fall as well as rise.
You may not get back the amount you invested.
