Market corrections and recessions don’t happen very often, every investor knows that. Just like what Warren Buffett, the richest investor who has survived more than 8 market cycles, says, “When it rains gold, put out a bucket and not a thimble”. The question is what would you do when the market presents itself to you?
Do not panic when you see the price of your holdings decrease in value
When a correction or recession comes, investors in the market panic as they see their holdings decrease in value. When they panic, many thoughts race through their minds and they start to think if they should sell their shares; and eventually most of them sell it off at a loss, thinking that a decrease in share price is actually telling them something about the stock. This is because the emotion of FEAR has overtaken them.
Instead of selling the stock, an investor should go back to the question of asking themselves, “Why did I buy this stock in the first place? Was I chasing the trend? Did I buy it because I heard it from a friend who talked a lot about it?”
If the answer is “YES!” to the questions, the investor who is holding onto the particular stock may want to consider cutting losses to preserve the remaining capital of what is left and then deploy it elsewhere into other stocks.
Continue to Dollar-Cost Average (DCA) down into stocks that you are highly convicted in
Investors who are highly convicted on their stocks/holdings should view this opportunity as buying or adding their favorite stocks on the cheap and continue to DCA down. If the investor does not know how to allocate the remaining funds, they can look at Exchange-Traded Funds (ETFs) that follow the S&P 500 index as an alternative. This is because even Warren Buffett back in 2008 made a bet of $1 million with hedge fund managers for 10 years, that they would not be able to outperform the market in terms of returns. When it came to the results, Warren Buffett won the bet where the S&P 500 index gave a return of 85.4% compared to the highest return of the hedge funds 62.8%.
Always remember that a market correction or recession does not last forever
Each investor should know that a market correction or recession does not last forever and that the market will eventually recover in future. When the market recovers and returns to its pre highs, and if the investor decides to start buying then, it would be too late as the opportunity of making during a correction or recession would be over. This is one of the reasons why it is important to stay invested and never try to time the market because time-in the market is always better than timing the market. Furthermore, it also shows how millionaires can be made in each market correction and recession as depicted by Warren Buffett’s growing net worth over time.
Invest safely!
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