How you react to stock market ups and downs does not show who you are. Rather it is an indication of whether you have an investing process and how comfortable you are with it.
So if you are panicking right now because of plunging stock prices across the world, it does not mean you are stupid, clueless or chicken-hearted. Nor does it mean you should never invest in stocks. It just means you either don’t have an investing process or if you have one, you are not comfortable or confident about it. And you can fix that. Starting today.
1. Invest with a clear purpose and time horizon.
Ask yourself what are you investing for? Is it for retirement, which is 30 years away, or for your child’s education 15 years later, or are you just trying to make a quick buck?
In case of long-term goals, you don’t have too much to worry about market volatility. In fact young investors should welcome a stock market downturn as it lets them put more money at work at cheaper prices.
If you were investing just to make some quick money because your friends told you so, let this be a lesson for you. You were greedy and you have only yourself to blame. What should you do now? Focus on your financial goals and re-direct your savings towards achieving them. In a few years you will still come out ahead than if you keep chasing hot tips.
2. Think in terms of your ‘net worth’ and not just your stock portfolio.
Stock investments are just one part of your entire net worth. You most likely have some cash in your bank account, some Fixed Deposits and most importantly – your future income stream. Some of you may even have a house. Implicitly or explicitly, you have a diversified portfolio of assets, stock market investments being one of them.
3. Choose an asset allocation according to your risk tolerance.
You cannot control how much the stock market will go down during bad times. In 2008 it went down 50%. It will happen again and you cannot control that. But you can control its effect on your overall net-worth. If you don’t want to lose more than 20% of your net worth at any time, don’t allocate more than 40-50% of your assets to stocks. Keep your risky investments at a level that allows you to sleep peacefully.
4. Save enough
To be able to reach your goals even if the stock market returns are just average you should save enough. In case they turn out to be better, you end up with much more but plan conservatively. Save at least 30% of your salary. Keep track of your progress and save more in case you are falling behind.
Focus on things that you can control. Know yourself. Get a plan that you will be comfortable with during bad times and then just stick to it without worrying about the ups and downs of the stock market.
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