Last week’s sell off inspired me to write today’s article to caution you when stock markets dive. When stock prices drop, one’s first reaction is to sell. That’s the worst thing you can do. The best you can do is sit back and wait for the market to recover. If you sell when prices drop, you lose. If you get back into the market when prices rise, you lose.
Let’s understand the concept of volatility and review 10 things that you should not do when markets dive.
1. Understand that volatility (ups and downs in short periods of time) is part of the stock market. It’s normal. Stocks cannot just keep going up. They have to come down too. To expect prices to just keep rising is unrealistic. To anticipate market downturns is realistic.
2. When markets fall, you haven’t lost anything. Such losses are merely paper losses… until you actually sell. So don’t panic and sell. Keep off that “sell” button.
3. History tells us that markets do recover, and when they do, they reward you with more gains.
4. Expect corrections (decline of 10 percent or more) at least once a year. Again, this is normal and expected.
5. Don’t take a short-sighted approach to stock investing. If you do, you get hurt from market swings. Don’t be a day trader unless you really know your stuff.
6. Be an investor instead. Take a longer timeline — say five to 10 years. That will keep you from constant selling whenever markets decline.
7. Keep emergency cash for buying opportunities. Corrections are the best times to buy. Buy the dip.
8. So when markets crash, buy, not sell.
9. These are also the best times to diversify and rebalance your portfolio. Take an inventory of your holdings. Avoid loading up on one sector like technology. Initiate holdings in aerospace and defense, industrials, biotech and pharmaceuticals, consumer goods, cannabis, and other sectors.
10. Buy good quality stocks on the cheap during these times of turmoil. Due Do your due diligence: research for quality stocks with low P/E (prices earnings) ratios, PEG (price earnings ratios with growth) of less than one, wide moat, low debts, and good cash flow.
If you sold last week, let that be a lesson to avoid in the next downturn.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at email@example.com.