Money & Career

5 reasons not to panic in a market downturn

Author: Canadian Living

Money & Career

5 reasons not to panic in a market downturn

If you're feeling a strong urge to dump all your stocks and avoid the market for the rest of eternity, you're likely not alone. Ted Rechtshaffen, president and CEO of Toronto's TriDelta Financial, says that when markets rise and fall as dramatically as they did in the first few weeks of August 2011, it's perfectly normal to get antsy. "Human nature is about fear and greed and that drives the market in a significant way," he says. "When things are down, the fear instinct kicks in."

But now's not the time to do anything drastic. If anything, hang on tightly to your stocks. Here are five reasons why you shouldn't panic.

1. What goes down must come up
Markets move in cycles – they dip and they climb – but for the most part, they go up. Over the past two decades, during which there were two major stock market drops, the S&P 500, America's main market index, has climbed 231 per cent. It may take some time, but the market will rise again.

2. Things are not different this time
Sir John Templeton, a legendary investor, once said that the four most dangerous words in investing are "this time is different." People are fearful, but just as the world didn't fall apart after the Depression, or the tech crash in the early 2000s, the market will not fall to zero this time, either. "It's never different," says Rechtshaffen.

3. Remember, buy low and sell high
It's one of the most basic principles in investing, but when markets fall many people forget that investing is about buying low and selling high. Instead of selling your portfolio at bargain basement prices, now's the time to scoop up myriad cheap deals. Make money by selling those stocks when the market recovers.

4. Investing is long-term
Day traders buy and sell stocks on a daily basis. Smart investors purchase stocks and hang on to them until they need the money in retirement. If you've still got some time until your golden years, sit back and relax and realize that downturns are just part of an investor's life.  

5. Companies are rich
Thanks to the recession, companies have trimmed their fat and are now flush with cash. Last September, the cash holdings of U.S. corporations were 7.4 per cent of total corporate assets – the highest relative cash percentage since the 1950s. This means that the companies you hold in a portfolio likely have money on hand to play with. They could increase dividends – quarterly or annual payouts to shareholders – or keep some cash for themselves if for some reason they get into trouble. So take comfort in knowing that many businesses on the market are healthier financially than they've been in years.

There are a number of other ways to keep your portfolio safe, but, says Rechtshaffen, stick to this plan when times get tough and you'll be able to retire easy.

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Money & Career

5 reasons not to panic in a market downturn