Seizing Investing Opportunities Amidst Market Turmoil
Why it's important to stay calm during a financial crisis
Welcome to the weekly newsletter, where we discuss all things investing. Today, we will be exploring the reasons as to why it is crucial to maintain a calm mindset and not panic sell your investments when the market is going through immense turmoil. This could be caused by a financial crisis like what happened in 2008, or more recently due to COVID-19, and also the looming threat of the US defaulting on their debts.
Why does the market suffer from worldwide setbacks?
Financial crises are inevitable occurrences within the world of investing. They can be triggered by a wide range of instances, such as economic recessions, geopolitical events, unexpected market shocks or even unknown outcomes of situations in the market causing fear among investors. During one or multiple of these situations, the market can take a harsh and sharp decline. Investors’ sentiment usually turns negative during this time, though it is essential to remember that financial crises are temporary and that markets will eventually recover like it has from every major crisis noted in history.
Understanding buying opportunities in financial crises
Financial crises often create an atmosphere of heightened fear and uncertainty within the markets. During these periods, assets tend to drop sharply in price even to the lowest that they have ever been. For most investors, it is very easy to succumb to panic and sell their investments for a loss hoping to avoid an even bigger loss in the future. As a result of this, it is key that when investing, to remember that financial crises also present significant buying opportunities. A prime example of this is during the 2008 housing crises like stated above, which saw drastic declines in stock prices. Whilst most people sold their assets, some very smart investors started to buy assets at all time lows to sell for an increased price in the future. Thought to be silly at the time, these investors made massive gains from taking advantage of discounted prices, having a long-term perspective while also dollar-cost averaging into their positions. Lets now
outline the factors used by these investors as the looming threat of US defaulting on their debt gets ever closer:
Discounted prices - When a financial crisis arises, the general price of assets experience a drastic loss in value. This presents a fantastic opportunity for investors who are willing to find these high-quality assets which will have a significantly discounted price during a crisis. In addition to this, buying at these lowered prices increases the potential for future capital appreciation when the market eventually recovers, thus allowing the investor to reap major benefits when the price of assets goes back up.
Value investing - In essence, this term means that when a market crash takes place, the general share price decreases massively due to investors selling out of fear at much lower prices. This can lead to a difference between the intrinsic value of a stock price and its market value. Ultimately, this enhances the opportunities made available to investors, as they are able to acquire shares from various companies at an undervalued price which will in future increase by considerable amounts.
Long-term perspective - This is one of the most important things to have during a financial crisis. This is because it takes a long time for markets to recover; typically on average they last around 18 months, however their duration can alter as a result of particular events. As well as this, history has shown that markets recover from their losses and eventually reach new highs. By investing with a long-term mindset and goal, investors can take advantage of this time to research and find great undervalued stocks to obtain and hold for those new highs in price.
Final Thoughts:
While financial crises can be unsettling and can make the best investors rethink their current choices, they also provide possibly the best buying opportunities for investors. By recognizing the above, investors can position themselves to benefit from the worst of financial crises. Despite this, it’s important to conduct thorough research, seek professional advice if needed and align investment decisions with your risk tolerance and financial goals.
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Happy Investing!
The Wealth Wave Team