Are you concerned about the Nasdaq's Sell-Off? Here's what you should do and what you should avoid:
In this chaotic financial landscape, it's no exaggeration to say that the market's performance recently is downright terrifying. The terrific nosedive of the tech-centric Nasdaq Composite (-1.96%) over the past three weeks - a whopping 12% - has left investors agitated about what lies ahead.
Are further drops in the offing? Before you throw in the towel, consider the wise moves to make - and the reckless ones to avoid. Maintaining composure may just see you emerge victorious even from this fiscal nightmare.
Avoid These Madcap Moves
1. Steer clear of impulsive decisions
Staying cool-headed is a breeze when the markets are tranquil and thriving. But when stress levels ratchet up and tensions mount, isn't the time to start making hasty investment decisions. Your emotionally charged state might cloud your judgment, nudging you into ill-advised trades.
Remember the long-term potential of the market, even in turbulent times. You don't need to take dramatic actions right away. Patiently waiting for the chaos to subside ensures that any decisions you do make are made with level-headed reasoning, not panic.
2. Shy away from blindly purchasing distressed stocks
Savvy investors are currently rummaging through the wreckage, and rightly so. Many quality stocks are remarkably discounted right now.
Keep in mind, however, nobody knows if we've hit rock bottom yet. If the market continues its slide, these undervalued stocks could plummet further. Even if we've reached the low for the time being, the residual effects of this downturn could prolong a volatile market for weeks.
Approach new investments with a lasting mindset and cautious optimism.
3. Resist the urge to recover immediately
Defer the impulse to quickly recoup the losses you've suffered since mid-February.
While it's easier said than done, this advice might help: Although there are more winning days than losing days for the stock market, the average daily loss is significantly greater than the average daily gain. Corrections like this one usually escalate quickly, with the Nasdaq reaching correction territory in just three weeks, but it'll likely take longer than that for the index to recover. Rushing to regain your losses by making speculative purchases or wildly buying and selling could be counterproductive.
4. Don't foretell a recession
Although economic worries are the primary reason behind the broader market's current downturn, that doesn't mean a recession is underway - or on the horizon. In fact, as one witty saying goes, "The stock market has successfully predicted nine of the last five recessions!"
Predicting the economy's direction is difficult, and trying to navigate it successfully is even trickier. In most cases, your best bet is to exercise discipline and stick to time-tested, high-quality stocks in the quest for a long-term portfolio.
Instead, Take Thoughtful Steps
There are also some constructive actions you can take in response to the downturn.
1. Acknowledge that market downturns aren't rare, nor portentous
What we've experienced since February's peak isn't extraordinary. Investors confronted similar setbacks in July of last year, and just a few months later, the Nasdaq had hit new highs. The index also bounced back from a similar-sized pullback in 2023.
While not every correction culminates in a prolonged downturn, most don't. Brokerage firm Charles Schwab ran the numbers, finding that only one out of five of the market's more recent corrections transformed into a full-blown bear market. Hightower Advisors puts it differently, pointing out that the S&P 500 suffers a correction in 64% of all years but experiences a bear market in only 26% of those years.
2. Be honest with yourself
Downturns often reveal that investors have let their guard down, taking on more risk than they realized. For comparison, while the Nasdaq is down about 13% from its record high, as of writing, the Dow Jones Industrial Average is only down 8%, and the S&P 500 is down 9%. This discrepancy is no coincidence: the Nasdaq is heavily weighted with the volatile tech sector.
While you can't change the past, you can start adjusting your holdings to suit a risk profile that suits your personal circumstances.
3. Develop or update an appropriate asset allocation plan
Any necessary changes to the way you choose stocks and manage your portfolio should begin with a written strategy. A well-defined plan with clear goals serves as a guiding light through these financial turbulences.
1. Recognize that market setbacks are common and often temporary: Remind yourself that periodic market downturns, such as the recent 12% decline in the Nasdaq Composite, are not rare occurrences. The market has faced similar corrections in the past, and it usually recovers over time.
2. Evaluate your risk tolerance and portfolio allocation: Its crucial to review your investment portfolio and ensure that your asset allocation corresponds with your risk tolerance. The volatility we are currently experiencing in the market might reveal that you have taken on more risk than you can comfortably handle.
3. Don't abandon investing actions altogether: Though it's important to exercise caution during market turbulence, it's also essential not to freeze your funds in a panic. Opting for a thoughtful approach to investing in high-quality stocks can potentially yield favorable long-term results.
4. Seek advice from financial professionals: Navigating the complexities of the finance industry can be daunting, especially during trying times like these. Seek the guidance of competent brokers or financial advisors to help you make informed investment decisions that are tailored to your unique circumstances.
