Economic crises do happen from time to time, often leading to recessions and depressions. The 20th century alone marked the occurrence of several crises, including natural disasters, geopolitical events and systemic failures, which caused markets to drop significantly. The recent outbreak of the coronavirus (Covid-19) is turning out to be a major crisis, which, as expected, has distressed hugely both stock and bond markets globally.
In the present chaotic market environment, many people are prone to panic and may not act rationally. They will focus on the losses they incur and totally ignore the fact that lower prices may actually present buying opportunities. During this time, instead of engaging in fear-based changes, investors should be patient, ignore the noise, and continue with a disciplined investment strategy.
Here are a few tips on how to navigate extreme market conditions:
1. Stick to your investment plan
Your investment strategy should always match your investment horizon, your investment objectives and your appetite and tolerance to risk. One of the greatest challenges you will face is managing your emotions when markets are turbulent.
2. Time in the market is what matters
If you have a long term investment horizon, investing in a strategy with a higher potential for growth but greater risk, may be a good idea, as you have the luxury to ride out any periods of investment losses. If, on the other hand, you are close to needing the money, it is often a good idea to reduce the risk in your portfolio to mitigate against sudden market movements.
3. Don't try to time the market
A few poorly-timed moves, like buying when markets are high and selling when they are low, or staying out of the market when it recovers, can have a dramatic effect on the performance of your portfolio. Trying to time the market is not only difficult to achieve but risky as well, as trying to avoid the worst drops means you may also miss the opportunity for gains.
4. Invest consistently, even in bad times
History has shown that some of the best times to buy stocks have been when things seemed the worst. Consistent investing regardless of market conditions can give you the discipline to buy stocks when they are at their cheapest and benefit from the excess returns that follow.