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The stock market is notoriously volatile. There are highs and lows every day, and if you're unfortunate, you might end up experiencing one of the worst stock market crashes in history. Figuring out how to navigate the volatility of the market is what will determine how successful you are as a stock investor.
Most of the time, people can figure out what to do when stocks start to climb up. But, when stocks start to drop, people rarely seem to know how to handle the dips and drops.
Through the ages, a lot of the best stock market trades in history were made by people who knew how to act when their companies' stocks started to falter. Here are some tips every newbie investor should know.
First things first, don't panic!
The worst mistake you can do when stocks start to drop is panic. Investing in the stock market is not an emotional game; it's one that should be based on facts. All stocks will have moments where they dip, drop, or at times, just plateau.
Most people, when they get approached with the possibility of having a stock start to falter, will sell. They're worried about losing the money they invested. Panic selling is the worst thing you can do. Panic selling will make you miss out on great returns later on.
However, you should take a look at whether you feel the stock is actually a good company.
If you want to invest like Warren Buffett, you will want to take some time to objectively figure out whether or not the company is one that you want to hang onto. Does the company provide good products? Are customers loyal? What's going on with the management? Is the company culture good?
Warren Buffett's advice is to ride out the dips if the company is a good one. If it isn't and it's clear that the company might not work out in the long term, selling is a better choice. Ideally, though, you'll do this before the times when stocks start to drop.
Rely on a diversified portfolio to ensure that you ride it out.
One of the best safeguards to have ready when stocks start to drop is to have a very well-diversified portfolio. Ideally, there will be many different types of diversification in your portfolio—including diverse choices in companies, industries, investments, and purchase times.
By having a more diverse portfolio, a dip in stock value won't harm your overall worth as much. Other items will be able to help keep the overall value afloat, which in turn, means healthier overall financial standing during tougher times.
Stop checking stocks so regularly.
Psychologically, one of the most devastating and self-defeating things you can do when stocks start to drop in value is to obsessively check their value. People tend to get more and more inclined to panic sell when they see stocks consistently dipping in value.
It's a much better idea to just lock your stock trading apps and just take a walk. Sometimes, riding things out is the best way to deal with stock market drops.
Sometimes, you're going to just need to develop a more "zen" outlook towards it all.
The stock market will always have moments where stocks will take a tumble, and moments where stocks will improve. Part of knowing how to react when stocks start to drop is realizing that you will need to accept the downs along with the ups.
The truth is that learning how to accept some losses makes you a better investor. After all, you can't win all the time and being more relaxed about it can help you figure out what you should do.
Unless the company that you're investing in had a major scandal, you should really do nothing.
Not doing anything is one of the best things that you can do when stocks start to drop—at least, for the most part. Assuming that it's due to regular market fluctuations, doing nothing just means that you will wait it out until the stocks increase.
That being said, a company that has stocks plummeting due to a problem or a situation that is specifically centered around them, your stocks might need to be sold off.
Some might actually even tell you to buy up some stocks.
A good thing to do before stocks start to fluctuate too heavily is to get some good reading material. One of the best books on investing ever written was The Intelligent Investor, and it was written by Warren Buffett's mentor, Benjamin Graham.
Graham pointed out that the wisest investors are the ones who find valuable stocks when the stock market isn't faring very well. If you want to profit largely, buy up shares of stocks that you wouldn't be able to afford during regularly bullish markets.
Reading The Intelligent Investor will help you figure out which stocks to snap up during this time.
If you can't afford to lose a lot of value in stocks, you may want to consider putting in stop loss orders.
Let's say that you have a lot more money than you can afford to lose in the stock market. In this case, the best way to deal with market downturns is to put a limit order that keeps your losses to a minimum. This way, you won't have to worry about stock losses being too great to make ends meet.
Oh, and if you do this, make sure to remember that you really shouldn't invest money you can't afford to lose.
A good idea, after the stocks drop, is to figure out what you've learned.
Part of being a good investor is learning. Everyone should keep learning, no matter how long they have been in the game.
If you lose a significant amount of money, ask yourself what you should have done right. Were there any warning signals? What would have happened if you were to have held on longer? Sold?
A lot of the time, short term losses tend to mean little in the long term. This is true with the S&P 500, the Dow Jones, or really any other Wall Street exchange you might try.
Basically, don't panic, and use your brain.
When stocks start to drop, your mind is your best friend. Keep emotions out of it and wait it out. In most cases, your stocks' value will come back up.