One prime consideration which investors take into account before investing is stock market performance. When the markets are stable and performing well—with indicators like the yield curve maintaining an upward trajectory—investor confidence grows and in turn, more capital is invested.
On the other hand, when corporate profits begin declining, inflation keeps rising, and long-term yield projections become bleak, investor confidence drops. More people begin to hold on to their cash reserves instead of investing. Those holding stocks get into a selling frenzy to dispose their assets and investors begin readjusting their portfolios to minimize risk.
Eventually, the economy takes a serious hit and everyone dives into a panic.
But what is the reason behind this? Why does the stock market keep going down?
Like the economy, there are periods when stock market performance rises and periods when it drops. The following are some of the factors that cause fluctuations in stock market performance:
a) Changes in the rate of inflation: Higher inflation rates result in an increase in the price levels of various commodities. This adversely affects companies’ bottom lines leading to a drop in investor sentiment—ultimately causing the stock market to tank.
b) Changes in supply and demand: When the demand for stocks in companies goes up, it results in a corresponding increase in stock prices to incentivize sellers. Conversely, when supply exceeds demand, stock prices drop to incentivize buyers to acquire stock.
c) Government policy changes: Changes in policy and regulations can cause the stock market to keep going down. For instance, the stock prices of crypto in nations that refuse to acknowledge it as a valid currency go down while stock prices go up in nations that recognize crypto as a medium of exchange and as an asset class.
d) Socio-political uncertainty: Socio-political uncertainty has an impact on stock market performance because factors such as wars and conflicts (think the Russia-Ukraine conflict) undermine economic growth and hence reduce investor confidence.
So what happens to your investment schedule when the stock market starts going down? Do you abandon all your plans, sell off your assets, then pack and go home? While stock market downturns are a cause of concern to any investor, they do not spell the end of your stock investment days.
Rather, when the stock market keeps going down, all you need to do is readjust your investment strategy. Below is a comprehensive guideline of how to invest when the stock market keeps going down:
In periods of stock market downturns, it is important to first observe market behavior. Take your time to understand whether the downturn is temporary and if markets will recover quickly or not. That way, you can avoid panic buying or selling that would negatively impact your future earnings.
Avoiding investor panic can also help you to take advantage of such market strategies as dollar-cost averaging. According to the Financial Industry Regulatory Authority, dollar-cost averaging is an investment strategy where “you invest your money in equal portions, at regular intervals, regardless of the ups and downs in the market.”
Dollar-cost averaging helps you to “take the emotion out of investing” so you can “buy more shares when the share price is low and fewer shares when the share price is high.” Consequently, you are able to reduce losses and pay a lower amount for shares in the long-run.
You should always adjust your portfolio when the stock market keeps going down. This is because the incentives that inform stock investments when the market is performing well change in periods of economic downturns.
Therefore, adjust your portfolio by going for low-risk investments like certificates of deposit (CDs), bonds and treasury bills while shifting away from volatile stocks until the market recovers.
You should also make a point of acquiring stocks in industries that have proven to be fairly insensitive to stock market downturns otherwise known as non-cyclical stocks. That way, you will be able to reduce your risk and maintain a steady stream of income.
The importance of diversification in managing bearish markets cannot be understated. This is because if your portfolio is dominated by investments in one industry or company, a market downturn would result in catastrophic losses for you.
However, investing in several securities from stocks and bonds to alternative assets (crypto) and keeping some cash as well is desirable when the stock market keeps going down. This is because such a strategy allows you to spread risk effectively and minimize the impact of market downturns on your portfolio and financial position.
Therefore, you should consider finding investing platforms that allow you to invest in several companies to create a downturn-defensive investment portfolio. Visit Alinea Invest to create your own investment playlist and strategically diversify your portfolio.
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