What to do when the market drops

As an investor, the first action you should avoid when the market drops is panic. Never panic, this can only lead to bad decision making.

Aneesa Razack, CEO of FNB Share Investing, says, “Understandably, the reason people invest is because they want to see a return on investment, in other words growth. This is not always the case, particularly in the short run, where the markets may at times experience negative growth. But nothing is permanent in the world of investments; the path to real investment growth is bumpy and requires patience and resilience.”

“Often when the market dips, even slightly, people’s first reaction is to act hastily, this can only be to the detriment of your investments. While the ultimate goal of investing is to realise growth on investments, there’s an element of risk that is innate to investing, especially in stock markets. It is therefore important for investors to understand the market risk to ensure an appropriate response in the event of a temporary drop in the market.”

In order to see your investment grow, these are some reactions you should avoid when the market hits a low:

Don’t sell on a whim
Realising investment growth is not about timing the market, but rather about time in the market – stay invested. When the market dips, the jittery investor’s first instinct is to sell their holdings, this is in direct conflict to the fundamental ethos of investing – staying the course through market fluctuations. Rushing to sell when the market sinks can potentially result in losses because the investor has to sell cheap when the market is low. In fact, a sluggish market could be an opportunity to buy more shares as some shares may have dropped and are cheaper to buy. In this way you are able to expand your portfolio and make some gains when the market rebounds over time.

Diversify further
A diversified portfolio reduces the impact of drops in the share prices of the various companies invested. Consult your financial advisor to conduct an assessment of your holdings; this may be the time to diversify your portfolio even further. Remember that when you are properly diversified you are less likely to feel the tremors of a tumbling market. So if your portfolio is not diversified properly, now is the time!

Stay put, block out the noise
There will be varying opinions about which direction the market is likely to go when it begins to recover. Remember that most of this is just predictions and never fact; it’s very hard to point out distinctly which direction the market will take. If it were possible it would be easy to predict a slump in the market.

Continue investing
In turmoil also lies opportunities – despite a slowdown in the market, continue investing and remain focused on your goals. Research shows that over the long term equities outperform all other asset classes. As such, a temporary drop in the market may present the perfect buying opportunity for the blue chip companies at significantly lower prices.

“Over the years we have seen the market dip on several occasions only to recover, and in this instance the only losers are the people that panic and sell. It’s better to maintain a long-term view on your investments, that’s the only way you will see growth,” adds Razack.

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