When the stock market suffers from frequent wild swings or a sharp downturn, investors often head for the hills. But a bad market shouldn’t cause you to bow out altogether. Instead, reassess your investment strategies to take advantage of the new opportunities that arise from a down market. Of course, investing during a market slump is considered risky, so it’s important to tread carefully. Here are a few simple tips to help you capitalize on a market downturn:
Decide on long or short term investments Here is your first step toward investing in a down market — establish your time frame. If you’re in a position that will allow you to weather the storm for a number of years before withdrawing funds out of your portfolio, then you might want to invest in promising undervalued or “bargain” stocks. If, however, you estimate a shorter time horizon, you may wish to eschew these stocks in favor of safer investments, such as bonds.
Research thoroughly It goes without saying that proper research is critical to achieving success on the stock market, even more so during a down market. Before investing in stocks, you should conduct a thorough examination of both its immediate and more distant past, in order to determine its outlook for the future. A good way to predict the performance of a given stock in a down market is to analyze how it fared during a previous one.
Value analysis Value analysis is an investment strategy made famous by investment mogul, Warren Buffett. Value analysis allows you to identify companies that have been disproportionately devalued during a market slump. Often, companies that are performing well can be undervalued by the stock market during a downturn. This creates an inexpensive and potentially lucrative investment opportunity for shrewd investors.
Explore alternative investment vehicles One of the most common reactions to a downward shift in the stock market is a move from traditional stocks to alternative investment vehicles. Certain commodities, such as precious metals, tend to perform well during a market downturn. Similarly, bonds are usually a sound investment in an economic decline because they are inversely correlated to the stock market.
Avoid poorly performing companies A down market is a great environment to find good stocks at bargain rates. That said, you must ensure that the value of the stock has declined only because of the current market conditions and not as a result of poor earnings or a bad outlook. Experts advise investing in dividend-paying companies during a down market to reduce risk and help buffer any potential drop in your portfolio.