Market downturns: for some it’s the end of investing, for others they haven’t even heard of it | Business

August 5 Japan’s Nikkei 225 stock index fell more than 12 percent in one day. – this is the worst result of this index since 1987. The S&P 500 index of the largest US companies fell by more than 3 percent. and lost $1.3 trillion in value. This recession has once again proven an important rule of investing – financial market fluctuations are inevitable, and investing always involves risk.

“This time, the sell-off of shares was prompted by rather pessimistic circumstances that occurred at the same time – worse than expected revenue growth forecasts of companies in the technology sector, decreased activity in the US labor market, and interest rates raised by the Japanese central bank. However, I would rather associate such a sudden and conditional short fall with psychological factors, former high stock price levels and forced closing of positions in cases where investors use leverage, i.e. borrowed money”, says D.Urbanovičius.

Company photo/Deividas Urbanovičius

Returning to Japan, for many years the country’s near-zero interest rates made borrowing cheap, with investors borrowing at minimal cost and investing the money in higher-yielding assets such as US tech stocks. However, as the Bank of Japan raised interest rates and the yen strengthened against the U.S. dollar, profits from such deals fell. This prompted investors to suddenly sell their stock positions, further accelerating the decline in the country’s major indices.

“Such and other similar market downturns can be very worrying, especially since it’s not always possible to predict when they will happen. Over the past 25 years, we have observed at least three extremely large market declines and a series of smaller corrections,” D.Urbanovičius reviews.

in 2000 after the bursting of the so-called dot-com bubble, the NASDAQ Composite index fell by almost 80 percent in two years. During 2007-2009 the global financial crisis, the S&P 500 fell about 57 percent, and it took about five years to recover. Meanwhile, due to the COVID-19 pandemic in 2020 in March The S&P 500 fell 34 percent, but the market recovered in August of the same year.

Loss or opportunity – depends on the investor

According to the expert, declines in stock values ​​can not only create psychological challenges for investors, but also create new opportunities. One of the biggest risks that investors can face during a downturn is panic selling (closing out a position). When the market begins to fall, fear can overwhelm even the most disciplined investor, prompting them to sell their assets at a loss to avoid the perceived further decline in stock value.

“However, such a reaction will mean record losses and prevent investors from benefiting when prices start to rise.” From a rational perspective, recessions can also create opportunities – falling stock prices allow investors to buy securities at a “discount” and can set the stage for profits when the market recovers. For example, investors in 2020 Those who bought stocks at depressed prices during the COVID-19 pandemic saw impressive returns as the markets eventually recovered. It’s true that not everyone can take advantage of opportunities in such extreme situations,” says D.Urbanovičius.

A diversified portfolio helps keep a cool head

Another risk factor is an under-diversified portfolio. If it is concentrated in only a few sectors or stocks, an investment portfolio is more vulnerable during downturns than one in which investments are spread over a wide range of them.

“For example, in 2000 When the dot-com bubble burst in the early 2000s, investors who had mostly invested in technology stocks suffered heavy losses as their stocks fell sharply. Diversification spreads risk between different types of assets, sectors and regions, thereby protecting against larger overall losses in the event of a downturn in one of them,” says the InRento expert.

A well-diversified portfolio can turn downturns into opportunities, and investors with one tend to panic less and make more informed decisions. The inclusion of relatively stable assets in a diversified portfolio, such as bonds or investments in real estate rental projects, can also help provide relatively greater protection against fluctuations.

The long-term perspective is important

According to D. Urbanovičius, the absence of a long-term investment strategy also increases the risk of losses. Investors who do not have a clear long-term investment goal and a plan to achieve that goal may stop investing when asset prices fall in the markets.

“A long-term strategy helps avoid panic during corrections or crises. By following a long-term plan, investors can take advantage of lower prices of investment products and ultimately increase the growth potential of their portfolio over time,” says the expert.

What investors should pay attention to

To avoid the negative impact of recessions, regularly review your portfolio and assess whether it is sufficiently diversified according to your tolerable level of risk, advises D. Urbanovičius. General investment practice shows that it is worth reviewing and supplementing the portfolio with “depreciated” products during recessions, but the most important thing is to understand that even a “depreciated” investment has not yet reached its price floor.

“Furthermore, investing in assets generating periodic income – for example through a crowdfunding platform for real estate rental projects – can provide greater stability and steady income and help reduce risk during volatile periods,” adds the expert.

Also, take a long-term investment perspective. By investing for at least a few years, you will reduce the impact of temporary downturns on portfolio growth.

Finally, according to D.Urbanovičius, constantly learn, follow financial and economic news and develop your financial literacy.

“By regularly paying attention to market trends, economic indicators and your own investments, you will improve your ability to objectively analyze market changes and react to them rationally, rather than based on emotions. In the long run, this will provide more reasonable confidence not only in managing potential risks, but also in seeing new opportunities,” the interviewer notes.