"It's always darkest before dawn." - Check out how this idiom can help you avoid investing out of panic!

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: Hello, everyone! Let’s start the day with some basic investing tips. Every Wednesday, we write about these topics with hopes that our articles can help you get on the path towards true financial freedom. In this article, we’ll explain why it’s important for investors to NOT panic, especially when the stock market dips. Would you like to know a few strategies to avoid panicking in times of market volatility? Read the article below. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

"It's always darkest before dawn." - Check out how this idiom can help you avoid investing out of panic! Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, says there are lots of events that make investors worried in 2022. In March, inflation rates hit a 40-year high—the highest it has been since 1981. Additionally, with China locking down its economy due to its zero-COVID policy and Russia’s invasion of Ukraine upsetting raw material supply chains, many investors are worried such issues could keep inflation rates high. What’s more? The interest rate on the 10-year Treasury has risen over 160 basis points in less than 6 months! Mortgage rates have also grown from 3% to 5.3% at a staggering speed. As a result, higher rates stifle credit creation and economic growth, and the gross domestic product (GDP) growth was negative in the first quarter. According to Professor Litman, one of Altimetry’s investor clients said the market is in the middle of one of the toughest periods of year-over-year growth comparison. Because of this, many investors are worrying and panicking, and the events above are reasons why… One Thing to NEVER Do When the Stock Market Goes Down Steve Joordens, a Psychology Professor at the University of Toronto Scarborough Campus, says economic downturns can be quite stress-inducing. During such situations, it can be easy to make emotional, knee-jerk reactions. In his words: “When we see the downturns start to happen, that becomes a big problem for us because it becomes a threat. And we have a very natural and primitive response to threat.” While our brains’ frontal lobes are in charge of rational decision making, the gray matter’s limbic system activates the fight-or-flight response when we’re faced with a threat. … and one of the emotions we feel in such events? PANIC. It’s part of human nature to panic during fight-or-flight situations, and stock market volatilities are no exception to that. However, Professor Litman and other investment strategists say that in times of a bear market, the best course of action is to NOT panic. Why shouldn’t you panic as an investor? Panic selling is some investors’ gut reaction when stocks are plunging and there’s a drastic drop in the value of their portfolios. Their immediate reaction is to sell at a low, which we mentioned in a past “The Independent Investor” article is a recipe for investing disaster. That’s why as an investor, it’s important that you know your risk tolerance and how price fluctuations will affect your portfolio. Being aware of these things beforehand will enable you to prepare to mitigate risks when actual market volatility comes. One more thing: If you’re investing in the stock market, keep in mind that the market is cyclical and stock prices going down are inevitable… but that downturn is only temporary. So, generally speaking, it’s wiser to think long term instead of panic selling when stock prices are at their lows. Here’s a “bear market strategy” that will help protect your portfolio whenever there are temporary dips in the stock market: Think of ways to limit your losses. To achieve success in investing, you must have a clear grasp of how the stock market works. This will enable you to prepare and analyze downturns, and determine whether you should sell more or buy more. Additionally, you should be ready when worse comes to worst and have a solid strategy in place to hedge your losses. For example: Investing exclusively in stocks may cause some investors to lose a HUGE amount of money when the stock market crashes. So, what they do is they strategically make other types of investments to divide their funds and reduce their risk. We discussed 3 asset classes where you can allocate your funds in a past “The Independent Investor” article. Think long-term. When you’re focused on the long term, you’ll more likely perceive a market drop as an opportunity to add to your holdings rather than a threat that can wipe out years of your hard-earned savings. Allow us to explain why… During bear markets, panicking investors sell stocks indiscriminately regardless of their quality. If you’re a contrarian investor, this will be a great opportunity for you because it gives you a chance to buy stocks with attractive prices and valuations. This will be beneficial for you in the long run, especially once the stock market recovers! Understand your risk tolerance. For first-time investors, a decline in the value of their portfolios can be unsettling. That’s why you should know your risk tolerance earlier on—like when you’re in the process of setting up your portfolio. Your risk tolerance depends on a number of factors, such as your investment timetable, cash requirements, emotional response to losses, etc. You may discuss these with your financial advisor or evaluate your investment strategy on your own. If you choose to do it by yourself, you may check out some available questionnaires online. Several investment websites offer these materials for free to give you an idea of your risk tolerance. — According to Professor Litman, it’s “always darkest before dawn.” When a situation like this happens in the world of investing, it’s human nature to worry that the worst is yet to come, to cut tail, and run. However, think about it as the coming of dawn—before the sunrise, what you’ll see or experience first is darkness. Similarly, when the market dips, know that it’s just temporary and it has no other way to go but up. Also, when you feel like you’re on the verge of panicking due to a stock market downturn, breathe. Professor Litman says oftentimes, the best course of action in such a situation is to do the opposite of what you’re feeling. “Pause, gather all the necessary data, and look forward.” … because when sensational financial news report that stocks are all red, but actual data on the margin seems to be improving, you have to disregard the headlines and believe what real data shows. Patience, not panic, is what you need to be a successful investor. As Professor Litman says, wise investors stay the course and take advantage to buy the dip. Take note of these basic investing tips and apply them in your own strategy! Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Wednesday’s The Independent Investor! In May of every year, several investors go on an annual “pilgrimage” to Omaha, Nebraska. The culmination of the journey is Berkshire Hathaway’s annual shareholders meeting, which is considered the “Mecca of the investing world.” Learn more about this important investing tip in next week’s article!