How to keep your pockets full during market downturns

Highlights

• Volatility is a characteristic of the securities market; ups and downs are common.
• When markets fall dramatically, savings get drained and profit booking is visible.
• However, there are tips and tricks to manage savings during a market downfall.

Have your investments hit rock bottom in the share market? Is your portfolio running in red?

Well, markets are known to be volatile, and people fear it precisely for this. Investments in the stock market are always subject to market risks, especially when an influencing event is gaining control over market sentiments. And when control affects negatively, markets are meant to fall.

What causes a market downturn?

The market gets into a downswing generally after an extended bull run. After reaching a certain level, investors begin booking profits, driving markets down.

Long-lasting inflation or a recession also impacts a market negatively. This happens, when an economy suffers due to declining GDP, higher unemployment, lower interest rates, and challenging times like the COVID-19 pandemic.

Now, when stock prices fall, a company’s valuation fall, affecting shareholders’ wealth. However, no investor would ever want to run out of money, ever!

So, what to do during such times when the market is not performing, and your savings are gradually dipping.

How to protect your savings from market crash?

Emphasis must be on a plan to develop a portfolio that reduces market risk. So let us list down below a few tips and tricks to save/manage savings. It is always prudent to prevent a loss before it occurs so,

• Prepare in advance and keep a balanced portfolio- Implementing portfolio management strategies and creating the right mix of stocks, bonds, and cash helps with risk tolerance. If the stock market crashes, your portfolio will still manage returns from debts. Now, the combination of equity and debt in a portfolio can keep changing based on market conditions. If portfolio balancing is done well, then investors’ funds remain cushioned from any adversities. During market downturns, the funds stay safe and when markets turn up again, and history says they always do, investors can earn profit.
• Invest in assets less correlated with markets- Not all investment instruments work in tandem with stock markets. Take, for example, commodities, forex instruments, derivatives and cryptocurrencies that work on a different function. Investing funds in these beforehand can ward off negatives of a falling stock market. Most institutional investors prefer to keep a part of earnings in alternative assets for this reason. Even investing Moghuls like Warren Buffet have funds parked into less correlated or instead negatively correlated funds. The principle of creating a hedge works well.
• Time market well and eliminate permanent losses- Timing the market well is a key to apt profit booking. When stock prices go down, investors must think before they sell. Investors should eliminate the only risk of a permanent loss of capital. Otherwise, savings don't tend to drain quickly. Instead, a slight loss may get recovered in multiples when the market regains pace. Often investors who sell after a market drop have lower long-term returns.
• Consider shifting to dividend stocks- This is critical, especially when managing retirement savings that cannot tolerate much risk. For protecting savings alongside a stable income, one must check out the stocks that have decent dividend yields. Dividend payments must be regular and if growing every year can make them even more attractive. Reinvesting your dividends over the long term can also help multiply earnings as companies pay dividends based on shares held. Stocks offering growing dividends can also give investors an edge over bonds. Since bond interest doesn't change, inflation erodes its value with time; however, growing dividends can cut that.

Read More-Why should people invest in Dividend paying stocks?

• Say no to property - When the market slowdown is for long-time blocking funds in property might not reduce any risks. Since most property buying involves financing, adding on or delaying loan repayments may not work for you. Investors must turn to safer options like gold rather than postponing payments and making them costlier or eroding savings to pay them off. Most investment experts and portfolio managers believe in parking some funds in safer assets. Investors who take some gold exposure tend to remain cushioned from the market slump. It is because gold and now even cryptocurrency, demand rises when equity markets fall.
• Slash out those expenses – Once income streams start thinning, one must look for means to maintain their reserves or savings. For this, cutting down some expenses like ordering food or getting an extra high-speed mobile data plan can work. A penny saved is always a penny earned, plus if in a bank account, you are earning interest on it too! Thus, in a slowdown, one must examine all expenses to identify means to gain more. Tweaking budgets and reducing discretionary spending can surprisingly delay the draining of savings in a sustained market downfall.

If still confused, let experts take control

If one can't manage the tanking markets even after taking all the above steps and more, seeking a financial advisor's help is worthy. Even alternatives like robotic advisors and programmed software are available. Moreover, a financial expert's advice not only helps in managing funds during downfalls but can also add returns to the portfolio, offsetting the fee charged for it.

Bottom line

Since it is challenging to predict a significant market downturn precisely, devising plans for coping beforehand is essential. The last thing investors want for their funds is a negative return. So, while investors can't control market movements, protecting savings from the negative turn of events is essential. However, one must also always remember that the stock market usually makes a comeback sooner or later. Thus, one must not fear investment.

Also read- Best saving strategy while preparing for any natural disaster