Investors are entitled to be anxious about the market and their portfolio. This is especially true when markets are turbulent, as we experienced during the COVID-19 Pandemic or the 2022 Bear Market. However, investing can still be an emotional process regardless of the economy and stock market.
It’s vital to keep your head cool during uncertain times. This article will discuss how to stay calm during times of uncertainty and even use market crashes and stock market corrections to your advantage, both in the long term and in the short term.
This is not intended as mental health advice but rather to address your financial anxieties as a stock market investor.
How to deal with stock market anxiety
There is no one way to reduce stock market anxiety. Here are some tips that will help you manage your stress and stay focused on your long-term goals.
1. Switch off the sound
When I turn on the financial reports in the morning and see the screen filled with red quotes and panicky commentary, I usually tell myself, “Today’s a good day for doing nothing.” I do not check the balance of my brokerage account, nor do I buy or sell any stock until things calm down.
Why? In volatile markets, investors can make irrational decisions due to their over-attention. Although it’s well-known that investing is about buying low and selling high, human nature often makes us “sell before things worsen,” which is exactly the opposite.
2. Verify your conviction
This section can be skipped if you only invest in index funds. When the stock market gives me anxiety (and this happens to everyone), I go through my portfolio to see how the companies are performing. If the company’s earnings and revenues are increasing at the same rate as they have been in the past few years and my investment thesis is still intact, then I don’t really care if the stock price has dropped.
You can sleep well if you have invested in a great business. Stocks will do what they want to. At one time or another, all the top-performing stocks have dropped by at least 50% and, in some cases, even more. During the dot-com bust ( AMZN 0.61%), it dropped by over 90% from its high. Great businesses can still deliver great returns in the long term despite volatility.
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3. Zoom out
When you feel anxious about the stock market, it’s a good idea to remind yourself that you are a long-term investor. The best way to do this is to visualise that stock investors are successful over the long term.
Take a look at this chart for the S&P 500, which shows the six-month S&P 500 graph ending on June 13, 2022. It’s terrifying:
This 10-year chart is far more promising.
The 2022 market drop is barely visible in this chart.
Strategies for taking Advantage of Turbulent Times
It can be useful to look for the bright side of a difficult situation as a long-term investor. You may not believe it, but there are ways to take advantage of stock market declines.
Tax-loss harvesting
Tax-loss Harvesting is a strategy for reducing your tax liability by selling investments that are losing money.
You can offset capital gains by selling an investment that has a loss. If you sell a stock for $5,000 in January 2024 and another at $3,000 in May 2024, the IRS will only count $2,000 as taxable gains.
The IRS will allow you to use up to $3,000 in capital losses as a credit against your other taxable income, even if you do not have any capital gains. You can carry forward any losses that exceed $3,000 to the next tax year.
Important to note is that selling investments just for a tax advantage is not a smart idea. If you are on the fence about a failed investment and see other ways to use that capital, then a drop in price is a good time to sell it and move on.
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Find bargains
Real estate investors have a saying: “You earn your money when buying, not when selling.” It is believed that the price at which you purchase an investment will have a greater impact on your long-term return than the price at which you sell it. Stock market investing follows the same principle. Asset prices will generally rise over time. You can’t predict what the price of a stock in 15 years, 20 years, or 30 is going to be. You can still take advantage of today’s bargains.
Nobody likes to see their portfolio value decline. One of the most important mindset milestones of my investing career came when I began to view stock market crashes as purchasing opportunities. Imagine that you are shopping in your favourite store, and suddenly, everything is marked down 50% for a limited period. How would you react to this? Warren Buffett said that, “when it rains, don’t use a thimble, but a bucket.”
A caveat that is important to make is about your risk tolerance and mental health. You shouldn’t put as much cash as you can into your brokerage if you’re not able to sleep well at night. Do it if it makes you comfortable keeping a certain amount in cash or letting your cash reserve build up during difficult times. The point is that market corrections and crashes are historically a good time for long-term investments to add shares to their portfolios.
Do not miss a second opportunity to earn a lot of money
Do you ever feel that you have missed out on the best stocks to invest in? You’ll be interested to learn this.
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We’re currently issuing “Double Down Alerts” for three amazing companies. This may be the last time we get a chance to do this.