How To Invest When The Stock Market Is Down

•  Ron.Moss

•  Dec 20 2022
 

The market volatility draws attention to the differences between professional investors and individual investors, who typically exhibit herd behavior. Having the proper intentions could be the solution.

We were reminded in December of last year that markets do not always rise and that they may even crash suddenly. With key indices losing up to 7% of their value in their worst year since the Great Recession of 2008 , it was one of the worst Decembers on Wall Street.

According to the legendary investor Warren Buffett, "when the downturn comes, you see who swims naked," and in fact, the enormous drops of December gave us the chance to observe the distinction between what is generally referred to in the stock market as the "smart money" and the "dumb money." The smart money is defined as capital that is handled by institutions like pension plans or training funds, whereas the dumb money is defined as capital that is owned by individual investors from the general public.

The private investors react, in general, to the rate drops with panic, and billions of dollars are sold during December. On the other hand, in most cases the smart money took advantage of those declines to buy stocks at lower prices.

The exposure to risky assets has increased

Past experience shows that those private investors who were quick to sell shares during the declines, will feel comfortable buying them again after the market has made most of the correction back, so that in practice a significant part of the private investors sold cheaply and bought again at a high price.

There are two reasons for this - the lack of proper risk management and the herd effect. Many times the small investors hear in the news about a hot sector or stock, but the information reaches them after this sector has already made an extensive move of increases - that is, the investors who enter after an extensive move of increases will lose most of the increase.

As for the lack of risk management, in contrast to the smart money of the institutional bodies, who invest according to a clear policy that they are obliged to comply with, most of the general investors do not follow a predetermined policy and strategy, but act according to the current market situation and with unplanned impulses. Thus, their exposure to risky assets increases as the market rises, and they buy at a high price.

Conclusions

The herd effect and poor risk management are a dangerous combination that can occasionally result from inexperience or going in the wrong direction. It is crucial to remember that even individual investors can employ professional advice to prevent errors of this nature and escape the numerous traps the stock market offers for those who are unfamiliar with it.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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