Don’t Panic: 5 Ways a Sharemarket Correction Can Help Investors

Summary

• Panic selling can lead to a substantial drop in investors hard-earned funds.
• Having an investment plan is essential to come out benefit out of a market correction.
• Stocks with good dividend yield and balance sheet tend to outperform the market during tough conditions.
• Despite crisis investors have seen markets march upwards.

Experts advise buying stocks in a falling market with a watchful step. Confidence, long term perspective and an investment plan can be beneficial to purchase shares.

Because of novel coronavirus (COVID-19) pandemic, markets heavily crashed in the month of February and March 2020, across the world. Investors were seeing gut-wrenching days after days in the financial markets as well as commodity markets.

In such textbook scenarios, when the market goes down, and the value of investors’ portfolios start to decrease, the fear takes over. Investors start selling stocks in a panic, which is precisely what they shouldn’t be doing. Panic selling is often investors first reaction when stock prices go down, which can lead to a substantial drop in their hard-earned funds.

Therefore, it is crucial to understand your risk-taking ability before investing, and chart out an investment strategy that fits your psychology so that the market fluctuation does not affect your decisions. Market corrections may seem detrimental to investors, it helps an investor to build a solid long term portfolio. It would not wrong if we say a market correction separates the wheat from the chaff.

Below are the five ways in which market correction can benefit a smart investor:

Low Share Price Increase the Dividend Yield:

Investors need to understand that a downturn in the market doesn’t necessarily mean losing out on your invested money. Even when markets are facing turmoil, it is possible to make money, for which a smart and patience investment decision is a must. For investors, investing in a falling stock with a high dividend yield can be a fruitful investment. Experts consider companies providing high dividend safer to invest than growth stocks but not in all cases.

The dividend yield provides investors with an idea of the cash dividend they can expect in return from the stocks they have invested in.

Another point to consider is regardless of how the stock performs, and the yield gives a reasonable recurring rate of investment return. As a result, when markets are falling, high dividend-yielding shares with good long-term dividend paying track record can be attractive to invest your money in.

Also read: How Dividends Will Pan-Out for Listed Investment Companies in 2020?

More Stocks to Diversify:

Market conditions are always fluctuating, as various factors affect the stock market. The growth and risk factors are not necessarily uniform across sectors; at times, a headwind in one sector could be a good tailwind for another sector. For example, the high oil price is bad for airlines but good for oil refiners. But we can never be sure about what happens in the market. Hence experts always suggest keeping a well-diversified portfolio to stay afloat in any market condition.

Diversification is an investment strategy and a motto for many investors and fund managers. The concept is that rather than investing all your funds in one stock, you can invest in various, especially when the market is under pressure and the stock prices are low.

Under market corrections, an investors options to look at a variety of sectors increases, as during such conditions many stocks across sectors tend to fall in prices. A portfolio of diversified stocks could hedge the investor to a certain extent and yield a higher return. Also, when you invest money on periodic bases into a targeted asset, you can buy more shares when the prices are inexpensive and a smaller number of shares when the prices are high.

Acquisition Opportunities:

Crises like the coronavirus pandemic and resulting market volatility will have an impact on mergers and acquisitions (“M&A”). On a massive scale and in a brief period, many companies have run out of business. They are facing a liquidity crunch because of the low demand for products and services. Companies have cut back on productions, laid off a considerable number of employees.

For businesses with a solid balance sheet, this can be a tempting opportunity to look for M&A. Investors can look or such special situation opportunities and ride the M&A wave to make good returns. 

Refinitiv’s research data shows mergers and acquisitions doubled in value, totaling $237.1 billion in the first quarter in the European markets. The U.K. is the most targeted nation in Europe and third in the world.

Also read: WiseTech Global Announced Swiss Acquisition

Business with Excellent Balance Sheet Remain Strong:

A steady financial base is everything for any investment, especially in the midst of a crisis. Industry experts believe that in emergencies, cash is king. Especially when the crisis leads to an industrial shutdown, like the current situation, having a strong balance sheet can help the business weather the tough times. Cash ratio, current ratio, quick ratio, long-term debt-to-equity ratio – all these factors of evaluation can make one understand the strength of the balance sheet. So, when you invest in a business with a strong balance sheet, chances of it weathering storms for longer than those without an excellent financial base could be higher. Businesses with a strong balance sheet can also afford to pay out dividend even during tough market conditions, thus rewarding shareholders when the stock price is muted.

Historically They Have Gone Up

One does not get the opportunity is to invest in low prices with significant volumes. In the past, there have been absolutely nasty performances and periods of bad crashes, yet investors have seen markets march upwards.

• Since touching its low point in March, the S&P/ASX 200 index has recovered by 30%.
• The U.S. based Dow Jones Industrial Average is up around 45%.
• The NASDAQ index hit an all-time high recently.

All this during the worst recession worldwide. Hence industry expert suggests remaining patient and not panic selling during market fall. If you have the capacity to hold your stocks for longer 20, 30 or even 50 years, one might get good returns.

The Bottomline:

Having a good investment strategy is half of the work, while the other half is to have the psychological will to execute the same. The markets tend to reward patient investors over the impatient ones. Thus, having a sound plan is essential to reap benefits in the long run.