Never in the history of the stock market has anybody said, “The Dow is down quadruple digits,” but on August 24, 2015, those words were uttered when it opened down 1,089 points. Every investor that saw this immediately had financial chills.
Popular cable networks began using headlines like “Markets in Turmoil” and “meltdown” that only added to the anxiety, but how worried should you be really? In fact, if you have money to put to work somewhere, is now the time? Here's our best advice.
1. Keep Calm and Sit Tight
If you have cash ready to go, don’t do anything just yet. There’s an old adage among investors during downturns: “Don’t catch a falling knife.” While the market has triple-digit velocity to the downside, that’s not time to jump in. (See Why Investors Should Consider Cash Right Now.)
Wait for the situation to stabilize. Remember that even if the market moves 3% or 4% higher before you buy, you’re still getting an incredible bargain compared to only one week ago.
2. Don’t Try to Get Rich Quickly
The same media outlets are saying that this is “a trader’s market,” but most traders lose money. In fact, some reports found that as many as 95% of shorter-term traders aren’t profitable. It might be true that the violent swings in the market are a trading opportunity, but it's one most people are better off missing. A few win; most get burned. If you have extra cash, invest for the long term.
3. Look for Dividend-Paying Stocks on Sale
While the media is using words like “turmoil,” professional investors are saying, “sale,” “bargain” and “buying opportunity.” Some of the best companies on the planet are now priced at a double digit discount. When a dividend stock takes a big dip, its dividend yield goes up. That means it’s an even better buy than just looking at price alone.
Stocks like Apple, Disney, General Electric and Deere are now on sale. Apple is down 20% from its April high. That could be a bargain if you do your research and believe that Apple, and many other leading corporations, have good times ahead. Not sure how to pick a stock? We can help.
4. Dollar Cost Average
Nobody knows where the stock market will be in a month or a year. Since you can’t predict the future, slowly put your money to work instead of all at once. Dollar cost averaging is simply purchasing at certain intervals. Maybe you purchase 100 shares of certain stock now and if it falls another 2%, you purchase 100 more.
5. Think Defensively
When the market is in a downtrend, follow the pros. Head for defensive stocks – companies that do well in challenging markets. Healthcare companies, utilities, and some food and beverage companies are examples of defensive stocks. These stocks often pay a dividend and work well for a long term hold. Then later, if you have money to deploy, and the market is in better shape, buy cyclical stocks.
6. Don’t Buy Stocks
Don’t feel good about individual stocks? Consider exchange-traded funds, bonds, bond funds, or mutual funds. Don’t know much about ETFs? Check out 6 Reasons Why Every Investor Should Consider ETFs , 4 Ways to Use ETFs in Your Portfolio and 4 ETF Strategies for a Down Market.
The Bottom Line
Don’t listen to the panic. Markets will go through periods of correction, but that doesn’t always mean there is a deep underlying problem that won't correct itself. In fact, pro investors see down markets as an opportunity to buy their favorite names at sale prices.
If you’re not an experienced investor, large, stable companies that pay a dividend that continue to impress are priced at bargains right now. That’s the perfect place to deploy some of that extra cash. For m ore information, read The Stock Slump: Is It Just Rate Jitters or Worse? and Strategizing for a Market Fall...or Rally.