About the handling of market dampening

You would not be a person if you had no fear of loss. We don’t know what else is expecting us this year. Here are 5 principles that can help to counteract the urge to make emotional decisions in times of market turbulence.

1. Market returns are part of the investment

Shares have mostly increased over longer periods, but history also teaches us that market vapors are inevitable for investors. The good news is that corrections (defined as a decline by at least 10%), swings (a longer decline of at least 20%) and other difficult phases did not take forever.

The S&P 500 Index has generally fallen by at least 10% at least once in 18 months from 1954 to 2024 and at least 20% every six years. The results of the past are no indication of future results, but so far there has been a relaxation and at some point a new market high.

2. What matters is time on the market, not market-timing

Nobody can predict how the market is developing at short notice, but if you do not invest, risk having strong recovery after swinging the market.

In 1929, each decline of the S&P 500 followed at least 15%. In the first year after these declines, the index rose on average by 52%.

Even if you only miss a few trading days, yield can be lost. A hypothetical system of $ 1,000 in the S&P 500 in 2014 would have been worth $ 2,869 at the end of 2024. If an investor had missed the 10 best trading days of this period, he would have achieved $ 1,571 (45%) less yield.

3. Make a plan and stick to it

The list and consistent implementation of a well thought -out investment plan is another way to avoid short -sighted investment decisions – especially if the markets are falling. This plan should take several factors into account, including risk tolerance and short and long-term goals.

To ensure that the temptation of the market timing is resisted, the use of the cost average effect is to invest a certain amount at regular intervals, regardless of whether the markets are increasing or falling. Then you buy more shares in low courses and less at high courses. This reduces the average costs per share. Regular systems (savings plans) are not a guarantee of a profit and no protection against losses. Investors should check whether you want to continue the savings plan even if the courses fall.

A good example of the cost average effect is pension plans in which investors automatically regularly invest a certain part of their salary.

4. Bonds can create a certain compensation

Shares are an important foundation of diversified portfolios, but bonds can create a sensible counterweight. This is because bonds are usually weakened weakly with the stock market, i.e. usually develop in opposite directions. When stocks rise, bonds fall and vice versa.

In addition, bonds that are little correlated with stocks can cushion the consequences of falling stock markets for their overall portfolio. Funds with this type of diversification can make portfolios more stable. For this purpose, investors should select bond funds with a success history in different market situations.

Bonds have less earnings potential than stocks, but they were often more stable for stock markets. The market slump in 2022 was unusual because many bonds of their usual task as a safe harbor did not live up. But bonds, measured by the Bloomberg Us Agregate Index, rose four times in the five market dwellings before 2022 and never fell more than 1%.

5. The market usually rewards long -term investors

Is it intentional to expect 30% yield every year? Certainly not. And if the stock corporations have fallen in the past few weeks, you shouldn’t consider it the beginning of a long -term trend. The behavioral economy teaches us that only briefly past events influence our perception and our decisions excessively.

You should always have a long -term perspective, but it is particularly important in falling markets. Shares rise and fall constantly, but in the long term they were mostly successful. Also considering swings, the S&P 500 has risen by 10.47% PA on average over all 10-year periods from 1939 to 2019.

Emotional decision is completely normal in volatile market phases. Investors who can hide the messages are better able to pursue a clever investment strategy.

This article mainly refers to US dollars and US dollar indices, but we assume that the principles mentioned also apply to other markets and currencies.

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