Take Advantage of Market Downturns

When there's a market correction, we can't help thinking about reallocating our investments to safer investments for our asset management. The money that we are losing causes our instincts to feel like we need to run away from risky stocks and place them into safer havens such as bonds and cash reserves. This may not be the best practice, as many asset management analysts will tell you. The fact that the market is heading for a downturn shouldn't make you take the "flight" option for safer investments.

There's a problem to what financial analyst would dub as "flight to quality". If you're investing for the long run, the best time to invest is when there are down turns. Reallocating your investments into cash or bonds will not help you sustain long term returns in your asset management. Why? The best time to buy stocks is when the market goes into a correction mode. The market tanks and the price per share for investments could be very cheap. By purchasing a cheap and beaten stock, you can improve your dollar cost average. This means the consistent contributions will make your purchasing average lower over the course of your investment history.

In fact, there has never been a downturn that has not been an opportunity. All corrections have provided investors with long term positive gains. By purchasing and reallocating to stock funds, you'll increase your returns over the long run. Also, consider if we would have investors go to safer instruments like bonds. What would happen to bonds? Because of the increased interest in debt securities, bonds will have a pretty high demand. High demand, of course, will cause the price of the bonds to rise. Would it be rational to purchase bonds, as a part of your asset management, when the par value is going up?

It's important to gradually buy more stocks than to aggressively purchase stocks in the market correction. Nobody knows if the downturn will continue further. So by gradual purchases in stocks, you will have enough to average cost for a longer period of time.

You must be selective in the market correction as well. Value is key here. Ask yourself a few questions. Which sector has gotten hit the worst? Which sector has the most value? By doing so, you can narrow down the specific sector that will provide you with the best long term value. For example, the small capitalization market could have gone down over 30% for the past month. Large- and mid-capitalization stocks have fared better by losing only 10% and 15% respectively. As one can see, the small cap sector could promise you the best value.

If you're able to contribute to the downturns, you'll enjoy stock market rallies even more. The contributions that you make during the downturns can make future gains even more enjoyable. Who would've thought you were able to purchase those investments at a nice low? Making money for the long requires quick decisions when the right opportunities come.

For asset management to succeed, the investor needs to understand that downfalls are opportunities, not time to take money out of important long term investments. The best investors understand how valuable a market crash or correction is. Take time to analyze which sectors are the best to allocate to. Doing so will go a long way.