Geopolitical unrest, acts of terror, tsunamis and tornados, crashing currencies, stalled growth and falling commodity prices can all create fear among investors. And that fear typically pushes markets downward.
In today’s era of social media and the 24-hour news cycle, market panics are faster and more furious than ever. The problem: all that noise can scare investors into making emotional rather than strategic decisions.
For example, the sudden and dramatic drop in oil prices in late 2015 and the non-stop media coverage surrounding that drop, created the perception that the sky was falling and everyone was impacted. That’s why, even though Canadian bank stocks were paying healthy dividends and reported their exposure to oil was minimal, people sold their bank stocks — the opposite of buying low and selling high (see "Why is it so hard to buy low and sell high?").
Bottom line: when fear and emotion guide investment decisions, people often sell solid investments only to regret the decision later on.
Here are a few key pieces of advice to help see you through the next event and protect your wealth.
Don’t React Immediately
Take a step back and look closely at what’s happening. Think through whether it’s really as bad as it may seem today. How far-reaching are the potential impacts? Or is the event a blip on the road to bigger and better, assuming the fundamentals of the market are still solid?
Assess Your Individual Investments
Are they falling strictly because they’ve been deemed guilty by association? If the investment itself is still poised for earnings growth then there is no reason to sell.
Learn From Past Experience
After September 11, the stock market recovered all its losses within months. The subprime mortgage crisis that began in 2008 and hit its lowest point in 2009 saw markets appreciate 68.6% one year later, according to Mackenzie Investments. The key takeaway: the market is resilient. I tell clients the fundamentals for this stock market to go higher have not changed. Interest and inflation rates remain low. Governments are still spending to stimulate growth.
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read all articles in Allan Small's Prime Earning Years Series ----------
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