Filtering High-Risk Positions
When some investors sense an impending risk, they follow the general sentiment and sell off their investments. Smart investors start selling high-risk positions, such as those with a high beta or significant volatility history, as well as those with new business models. Some even sell their positions in the most stable companies as a hedge against losses.
However, experienced investors do not follow the nervous investors who hastily sell everything and sit on the sidelines. If you sell everything, you might miss out on great opportunities if the market rebounds from its lows.
Instead of selling everything, the best investors sell high-risk investments in their portfolios while holding onto stable investments in well-established companies, such as those with large market capitalizations.
Accumulating Cash
Some prominent investors do not sell when they sense a downturn in the market, but instead stop putting any additional cash they usually invest. For example, investors who hold large amounts of dividend-paying stocks may stop reinvesting and hold onto cash as a hedge against portfolio losses.
Accumulating cash allows you to weather the storm relatively unscathed if markets turn negative. Even if your stocks lose much of their value, investors who have cash on hand can wait for the perfect moment to start investing again. The gains they realize when the market rises after a downturn can help offset the losses in the stocks they held during the decline.
It is worth noting that accumulating cash is not a long-term solution. Savings accounts earn low interest rates. Combined with inflation, your cash can earn negative interest rates and ultimately lose value.
Investing in Fixed-Income Securities
Investors may move their money into fixed-income investments when the markets appear unstable. Fixed-income investments come in various forms, including bonds. Bond prices tend to move in the opposite direction to stock markets, so when stock prices fall, bond prices rise. In the case of a significant market decline, bond prices may drop along with stocks, although bond yields should increase in turn.
The bond market consists of different types of debt securities, including corporate bonds, government bonds, and municipal bonds. Corporate bonds are debt instruments issued by large companies. Government bonds come in various types. Municipal bonds are issued by local governments, often with tax advantages.
You should be aware that if you bet heavily on fixed-income investments, they will lose value if interest rates rise. Individual bonds will always pay a predictable amount as long as the issuer does not default, but prices fluctuate in the secondary market, where many consumers buy and sell bonds.
Buy, Buy, Buy!
Famous investor Warren Buffett shared this wisdom in his annual letter to shareholders: “We simply try to be fearful when others are greedy and to be greedy only when others are fearful.”
In other words, when markets are at their peak and people are bragging about profits, a decline in stock prices is likely to happen soon. On the other hand, when investors are fearful and anxious about bad conditions, there may be a sharp market rise in the future.
One way to buy stocks during a market downturn is through a strategy known as dollar-cost averaging. This is when investors consistently contribute the same amount of money each month to their investments. When stock prices are high, they may only be able to purchase a few shares, but when prices are low, they will be able to buy more. Over the long term, this strategy reduces the average price per share they own and can be a smart move if (and likely when) the market recovers.
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Buying strategies are not without risks. While investing in a bear market often leads to substantial profits, there is a chance that the market has not yet reached its bottom. However, when the market begins to rise, you will enjoy greater gains than those who did not buy during the market downturn.
Summary
Every investor has their own way of dealing with poor market conditions. Whether you choose to follow one of the strategies mentioned here, or decide to create a unique plan for bear markets, the key is to avoid random reactions. A slow and steady approach will yield the best results, regardless of the specific strategy you try to follow.
Source: https://www.thebalancemoney.com/what-investors-do-when-market-falls-4140755
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