Stock markets are not rational. They don’t always follow a steady trend. Sometimes they even crash. This can be for a number of reasons – anything from natural disasters to terrorist attacks, wars, surging oil prices and global financial crisis.
So you have an investment portfolio and the market crashes. What should you do?
1) Don’t panic! The thought of your hard earned cash going up in smoke ignites feelings of fear, but, ultimately that is one of the reasons behind the crash – when a negative event sends investors scrambling they all tend to go at once, in herd formation - scared that they will be the one left without a chair when the music suddenly comes to an abrupt end.
Instead, just sit tight. Maintain your investments and resist the temptation to jump ship.
Because what seems like a nightmare may actually be one of the best times to get into the market - or stay invested.
In the US, the best five-year return in the U.S. stock market began in May 1932—in the midst of the Great Depression.
In Indonesia, stocks sank in 2008 because of the global crisis. But ultimately they bounced back (see chart below).
2. Make sure to pick stocks based upon a long term strategy. Anything less than 3 years is very risky. But over a longer - five year time horizon, say, – the volatility should be shaken out.
3. Be comfortable with your investments. If you have highly profitable companies in your portfolio you shouldn’t be worried if the market sinks. If, however, you have chosen some “dogs” you may wake up at night covered in sweat!
4. Diversify. Pretty obvious, this one. Make sure you have a well diversified investment portfolio. I’d suggest around 15-20 different stocks plus property and cash.
5. Do not try to time the market. This is a mug’s game. You may miss the periods when stocks rise and be in the market when stocks decline. Some investment advisers say they can predict the market. They are generally right about 50 percent of the time – i.e. no better than a random flick of the coin.
6. Invest regularly
Make regular investments over the years and you can actually benefit from a volatile market. This is because you’ll tend to buy more shares when prices are low – i.e. after stock market sell-offs – than when everyone is bullish (i.e. when prices are high).