Don’t be scared: How to keep your head during market slumps

As I watched the market take a nosedive, I winced. “We put more money into the investments, just before it turned. We could have waited and bought the dip!” I said to my husband.

It can be easy to feel unnerved during a market dip, but it’s essential to stay calm.Credit: Simon Letch

“It’s not about timing the market.” He started back. I sighed. Of course, I already knew this.

“Yeah, I know … but it doesn’t hurt if you just happen to buy the dip, right?”

Market downturns can trigger a lot of stress for investors, so I want to answer some of the common questions I see coming up during them.

“Isn’t this a sign investing is risky, and I shouldn’t invest?”

If you’ve been teetering on the edge of investing for a while, but you’re scared, then market downturns don’t help. They add to the fear, and confirm your anxieties: markets are volatile, your portfolio could nosedive big-time overnight, and you could lose a big chunk of money.

You haven’t actually lost money yet. You will, however, crystallise the loss if you sell.

This can often lead to continued hesitation and procrastination – maybe you’ll just wait until the market stabilises, or go back to your research and find a more stable asset-class.

Here’s the thing – short-term market instability is less relevant if you’re a long-term, buy-and-hold investor because historically, markets do recover eventually.

Now, no one knows how long it takes for the market to recover, so really your ability to keep your money invested through the instability until the market recovers is pretty crucial.

But market instability does matter if you need to draw on the invested money in the near future. So, for example, if you’re about to retire, you might not want to put all your money into the sharemarket because you might need to cash those investments out sooner than later.

However, even then, that doesn’t mean you shouldn’t invest at all because you can still have a larger allocation towards defensive assets (like bonds, precious metals, etc) and then a smaller allocation towards growth assets that will give you some growth longer term.

So, if you’ve been about to take the leap into investing, don’t let the market dip scare you.

“Should I sell my investments before I lose any more money?”

You haven’t “lost” money. I know you logged into your investment account, and you saw the number has gone down significantly, but guess what? That’s just a number on a screen.

You haven’t actually lost money yet. You will, however, crystallise the loss if you sell.

If you bought an investment property a year ago, and today someone told you that the property is worth less right now than it was when you bought it, would you sell out of a panic?

Not if you had faith in the property, long-term. You’d understand that the valuation will fluctuate occasionally, but long-term, over a period of years (or decades) it is likely going to be fine.

So, if the only reason you’re selling the asset is because the market is down, you’re panicking because the number on your screen is going down, and you want to “get out” before you lose any more, then what that tells me is that you don’t have faith in the asset long term.

That could be because you bought a poor investment. Or it could be because you didn’t really understand the investment you bought and its long-term potential.

Investing is all about staying in there for the long term.Credit: Louise Kennerley

So, instead of focusing on whether to sell right now, put a little more time into understanding the investment you’ve bought, to determine whether it’s an investment worth holding long-term.

That’s not dependent on what the market is doing in the short-term, that’s dependent on the characteristics of the investment itself – is it a ‘good’ investment?

“But is this a sign of a longer-term downturn or instability?”

I’m not in the game of making predictions, and I also take with a grain of salt any predictions about what’s going to happen in the near future. No one has a crystal ball.

That said, there are some core principles that can help you through longer-term instability. The key thing to remember is that investing is a long-term game. How long? The longer, the better. This means, you really only want to be investing money that you don’t need short-term.

Ideally, you should have enough cash to meet your short-term needs before you start investing.

So, if the market takes longer to recover, you don’t need to draw on your investments for your short-term cash needs, and you can leave the investments untouched until the market recovers.

Paridhi Jain is founder of SkilledSmart, which helps adults learn to manage, save and invest money through financial education courses and classes.

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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