2023-08-07 07:45:00
The advice to follow to react well to stock market fluctuations. (photo credit: GettyImages)
Are you investing in the financial markets and your securities are experiencing a sharp drop? Before giving in to panic, it is essential to take a step back and react in a rational way. Indeed, volatility is a reality that every investor must face. A few basic principles make it possible to react constructively and to avoid bad choices due to hasty decisions.
Summary:
Tip 1: Keep your cool when stock markets go down Tip 2: Think long term when investing in the stock market Tip 3: Diversify your stock market investments Tip 4: Invest in different markets, sectors and geographies Tip 5: Protect your earnings from the stock market
Tip 1: Keep your cool when stock markets go down
This is the most important point, the first rule to respect as an investor. Fear of losing your investment amount can be pervasive when investing in the financial markets. Yet this emotion is a poor guide. It can be destabilizing and lead to irrational decisions. On the contrary, keeping your cool allows you to analyze the situation in a pragmatic way. It is a necessary condition for making the right decisions. Financial markets are by nature cyclical. This therefore means that prices generally end up going up. Haste is not your ally.
Second tip: think long-term when investing in the stock market
Unless you are a very active investor, or even a professional trader, you should think of the stock market as a long-term, even very long-term investment. Market fluctuations are inevitable. They are an integral part of equity investing. The history of stock markets shows a general upward trend over a period of several decades. It is possible to see this by studying the data on this Boursorama page, dedicated to the CAC 40. You will find there analyzes of various cycles (3, 5, 10 years, etc.). Each period shows a very clear rise in the index.
Third tip: diversify your stock market investments
Diversification is an effective strategy to reduce the risks associated with a decline in stock prices. Consider investing in different types of assets:
shares of different companies, bonds, mutual funds, commodities…
By spreading your portfolio across different mediums, you reduce your exposure to a single specific market or sector, thereby mitigating the effects of a possible decline. Indeed, when a price collapses, it can be lonely. The other clues may be doing very well.
Fourth tip: invest in different markets, sectors and geographies
Diversification is not only sectoral, it can also be geographical. Certain declines in assets are sometimes influenced by economic, political or social factors specific to a given region or sector. For example, a change of government can have a very negative impact on a country’s stock market. Minimizing your risks can therefore also involve creating a portfolio exposed to several foreign securities (10% to 15%, for example). By doing so, you lessen the potential impact of a decline in a single region or sector.
Fifth tip: protect your gains from the stock market
Stock market turbulence does exist. However, you can still make trade-offs. These are even essential in times of high volatility. By regularly cashing in your winnings, you protect them from a possible decline. To grow your savings on the stock market, it is essential to also know how to sell. A “lean period” can be a good time to part with certain securities, especially the most valuable ones.
You can also use stop-loss. This device allows you to set a price level at which your position is automatically sold if it deteriorates too much. The stop-loss is a tool to take into account at all times, especially when the market turns. It also protects you from irrational decisions made under the influence of emotion.
The CAC40: some lows, many highs!
Since its creation in 1987, the flagship index of the Parisian market has experienced periods of rise and fall. Investors still painfully remember the crashes (those significant drops in the index in one or more days) during the financial crisis of 2008 and the health crisis of 2020. However, the CAC40 follows an upward trending curve if the we look at its evolution over the long term. Between its launch and the end of June, the index rose from 1,000 points to more than 7,390 points last April. This observation illustrates the importance of considering investing in the stock market as a long-term strategy.
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