When Stock Markets Start Falling What’s the Best Investment Strategy?

Here are some of the things you can do when volatility hits Wall Street.

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Wall Street volatility over the last few weeks over the impact of the coronavirus has investors worried about a stock market crash.

The Dow Jones Industrial and S&P 500 suffered their biggest sell-off on Monday since the Great Recession in 2008. Fears over the impact of the coronavirus shutting down major economies and falling oil prices have many wondering if the market's bull run is over.

You might be wondering what is the best investment strategy moving forward. While there's a lot of uncertainty about the impact of the virus in the short-term, there are investment strategies you can take when the stock market starts to go down.

The Dow Is Down! What's the Best Investment Strategy?

The Dow Jones Industrial has been at an all time high in recent months, hitting as much as 29,551.42 set on Feb. 12, 2020. For the seasoned investor, the downturn isn't that unexpected. After all, when markets go up a lot, they eventually come back down.

When we look at small numbers, they look manageable so we’re more comfortable with them, but when we look at large numbers we get a little scared.

It doesn’t matter if there’s no substance to the fear of larger numbers — perception alone is what causes people to act. If enough people get spooked by a big number, a sell-off will follow, facts be damned. So it was with the last three major market downturns.

The 1987 crash happened just a few months after the Dow topped 2,700. Did the fear of a 3,000 market have anything to do with that?

The 2000 slide began after the market topped 11,700. Was 12,000 looking like too much to handle? In 2007 the decline began after the market broke past the 14,000 mark, then dropped the Dow by more than 50%. Did investors decide that 14,000 overshot the mark?

There are obviously a lot of other factors that can contribute to Wall Street falling from all-time highs, including the most recent economic fears. Still, it helps to hold onto your investments for the long-term if you know how to handle short-term uncertainty and figure out the best investment strategy for you.

Buy When Everyone Else is Selling

The standard investing advice on Wall Street has always been to buy when everyone else is selling. Is this a strategy that you plan to follow?

If you do, at what point do you start buying and how aggressively?

One of the problems with this strategy is that you could buy-in after the market has fallen. So what happens if, over the next year the market falls another 30% from that level? You may not take as big of a hit as people who bought in at of the top, but you'll be taking a large hit nonetheless.

The previous two market slides have shown that a drop of 50% or more is hardly out of the question.

Sell and Limit Your Risks

Another option is to start selling, so you free up your cash and can buy stocks later at bargain prices. This is an excellent strategy, but there is one serious flaw. At what point do you push the panic button and begin selling again?

Trying to sell into a declining market can be something like chasing a greased pig. A 10% or 20% decline in the market is hardly uncommon.

If you sell after the market has sold off, there is a huge risk that the market will turn up, locking in your losses and preventing you from participating in the recovery.

The basic limitation is that you can never know if a drop is a routine correction or the beginning of a protracted decline.

Hold and Stick to Your Game Plan

If a market decline turns out to be a correction — as most are — it’ll be easy enough to just ride it out until the market resumes it's climb.

But during more serious declines, like the 1973-74, 1987, 2000-02, and 2007-09 markets, the ride down can be serious white-knuckle time. Those are the kind of markets that test even the most committed investor’s resolve.

Even though in each case the investors who held on well past the crashes were handsomely rewarded for their perseverance, it’s often difficult to accept that concept after stocks have fallen significantly and are continuing to do so. It can take nerves of steel, and not everyone has that.

 

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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