Stock Market Down? Here's What You Can Do

Hi Reader,

Welcome to The Money Series and if you are new here, thank you for signing up. Personal Finance can feel ambiguous and overwhelming, but I am here to help simplify the journey.

Bringing this back based on recent stock market developments.

So, you’ve invested in the stock market and now share prices are falling.

I know how unsettling this can be, especially for a new investor. Investing in the stock market can be a rollercoaster ride. But let’s take a step back and unpack what’s happening.

Understanding Price Movements

Stock prices are driven by supply and demand. When the demand for a stock is high (meaning more people want to buy than sell it), the price rises as buyers are willing to pay more. But when supply exceeds demand (meaning more people are selling than buying), the stock price tends to fall, as sellers are forced to lower their prices to attract buyers. In the case of falling prices, there are more sellers than buyers of the stock and this can be due to several reasons - poor financial performance, rising interest rates, major corporate actions, broader economic concerns, etc.

Price vs. Value: A Key Distinction

You need to understand the difference between Price and Value. Think of it this way: if you believe an item is worth $10 and you buy it at a current price of $5, a price decline to $4 implies that you can buy one more at a lower price and reduce your average price to $4.5. When the true value is realized, you make a $5.5 profit instead of the initial $5. This is the foundation of the Dollar-Cost Averaging strategy.

The Myth of "Losses"

Know that the decline in the value of your shares (and by extension, the value of your stocks ETFs, index funds, and mutual funds) portfolio is a paper loss, not an actual loss. This paper loss becomes real only if you sell your shares at a lower price. No matter how far the stock market drops, you won't actually lose any money unless you sell your investments. Patience is your ally here.

Strategies for Different Investment Types

If you have invested directly in individual stocks, you should dig deeper into the fundamentals of those stocks when prices fall. You want to know if investors are selling the shares because of poor financial performance or if the decline is tied to broader market sentiment. Stay invested if you are a long-term investor and believe in the company’s long-term prospects. Buying more shares at lower prices to reduce your average cost could be a smart move. If you believe that the company’s prospects are doubtful, then you can sell the shares.

On the other hand, if your portfolio is built around ETFs, index funds, or mutual funds, you are already relatively diversified, and the likelihood that all the companies whose shares are included in the index would perform poorly simultaneously is quite low. In this case, the best approach is often to stay the course or buy additional units to average down your cost. When the market recovers, you’ll be positioned for stronger returns.

You can also consider investing in other asset classes - bonds, real estate, commodities - to diversify your investments.

Long-Term Perspective

Remember, that your investment in equities should be a long-term strategy and should be done to stay invested for at least 3-5 years. Stock markets are cyclical—short-term dips are common, but long-term trends tend to be upward. Avoid putting short-term funds into stocks, as market volatility can jeopardize your immediate financial needs. Also, maintain an emergency fund before investing in stocks to avoid selling your stocks (and possibly, realizing losses) when life happens.

If you’re uncertain about what to do, consider speaking with a financial advisor to evaluate your portfolio, risk tolerance, and long-term goals.

Reflect on This:

• Are you currently invested in the stock market? How’s your portfolio doing?

Till next week, I am rooting for you, money-ly!

Dee

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Disclaimer: This does not constitute financial advice. Please conduct your research or consult your financial advisor for important financial advice.