You can never really earn your wings as an investor until you weather a market downturn. The valuable lessons learned can help you through the bad times and can be applied to your portfolio when the economy recovers. Listed below are some common investor experiences during tough economic times and the lessons each investor can come away with after surviving the events.
Lesson 1: Keep your dough spread out
You're pulling your hair out because everything you invest in goes down. The lesson: Always keep a diversified portfolio, regardless of current market conditions.
If everything you own is moving in the same direction, at the same rate, your portfolio is probably not well diversified, and you could stand to reconsider your asset-allocation choices. The specific assets in your portfolio will depend on your objectives and risk-tolerance level, but you should always include multiple types of investments. Now a days its way too easy to diversify, so just do it!
Lesson 2: No Such Thing as a Sure Thing
That stock you thought was a sure thing just tanked. The lesson: Sometimes the unpredictable happens. It happens to the best analysts, the best fund managers, the best advisors, and, it can happen to you.
The perfect chart interpretation, fundamental analysis, or tarot card reading won't predict every possible incident that can impact your investment.
More often, an investment is impacted by a combination of events. Don't kick yourself over unpredictable or extraordinary events like supply-chain failures, mergers, lawsuits, product failures, etc.
Lesson 3: Proper Risk Management
You thought an investment was risk-free, but it wasn't. The lesson: Every investment has some type of risk.
You can attempt to measure the risk and try to offset it, but you must acknowledge that risk is inherent in each trade. Evaluate your willingness to take each risk.
Lesson 4: Liquidity Matters
You always stay fully invested, and you find yourself missing out on opportunities requiring accessible cash. The lesson: Having cash set aside in your account enables you to take advantage of high-quality investments at fire sale prices. It also decreases overall portfolio risk.
Over the years of investing I have always found times where I wished I had excess cash to take advantage of an opportunity. So set a specific percentage of your overall portfolio to hold in cash.
Lesson 5: Patience
Your account balance is lower than it was last quarter, so you overhaul your investment strategy before taking advantage of your current investments. The lesson: Sometimes it takes the market an extended period of time to bounce back.
Your overall portfolio balance on a given date is not as important as the direction it is trending and expected returns for the future. The key is preparedness for the impending market upturn based on an estimated lag time behind market indicators. Evaluate your strategy, but remember that sometimes patience is the solution.
Lesson 6: Be Your Own Advisor
The market news gets bleaker every day - now you're paralyzed with fear! The lesson: Market news has to be interpreted relative to your situation.
Sometimes investors overreact, particularly with large or popular stocks, because bad news is replayed continuously via every news outlet. Here are some steps you can follow to help you keep your head in the face of bad news:
- Pay attention and understand the news, then analyze the financials yourself.
- Determine if the information represents a significant downward financial trend, a major negative shift in a company's business, or just a temporary blip.
- Listen for cues the company may be downgrading its own expected returns. Find out if the downgrade is for one quarter, one year or if it is so abstract you can't tell.
- Conduct an industry analysis of the company's competitors.
After a thorough evaluation, you can decide if your portfolio needs a change.