What should you do when the stock market drops?
In this article, we'll walk you through the world of stock markets and explain how you should react in the event of a crash.
Understanding financial markets and their fluctuations is baffling for many. Even finance experts have to grapple with uncertainties and factors beyond their control to try to understand current and future market behaviour. This is especially true in the event of a stock market crash.
How should you react when the markets fall?
Although the current situation is exceptional and filled with uncertainty, it's better not to let your emotions dictate your financial decisions. When you invest in the stock market with a medium- to long-term savings objective, it's normal for the value of your investments to fluctuate. The stock markets are always going up and down!
Hold on to your investments when the markets go down
Keep in mind that if the financial markets experience a downturn during times of uncertainty, history shows that you can usually expect an upturn later on. For this reason, during a downturn, it's important not to lose sight of your savings strategy and objective so as to avoid making sudden impulse decisions.
Selling your stocks when the market goes down is akin to cementing your losses. What's more, you'll miss out on a likely upturn after the worst of the crash, along with greater potential gains over the long term.
When it comes to investing, you have to let time do its work. Investing in the stock market can be a good way to meet your medium- to long-term investment objectives if you have the right risk tolerance.
The stock markets can still meet your investment objectives, if you have a certain tolerance for risk, for medium- or long-term projects, because they will bounce back over time.
If you would like to get advice on FlexiFonds products, please consult a FlexiFonds mutual funds advisor, who will be able to help you make the best decisions for your situation while keeping your savings goals in mind.
The state of the markets two years into a health crisis
The ongoing health crisis is curtailing the prospects for global economic growth, especially after two years of historic stock market performance. A rise in interest rates is likely to garner the most attention and should reduce some of the uncertainty that's currently plaguing the markets.
Market volatility first affects stocks that have seen strong gains since the beginning of the pandemic. Tech companies are a good example of this. Québec has fewer businesses in this sector than our neighbours to the south, and many analysts expect Canadian markets to outperform U.S. markets in 2022.
The geopolitical framework has also been disrupted by the war in Ukraine. In addition to having a negative impact on investor attitudes, this crisis is driving up the price of oil, which could increase the pressure on inflation in Canada.
Analysts agree that investing in the stock market should remain relevant in a situation where inflation rates are higher than the usual targets set by the Bank of Canada.
Financial markets 101
By definition, a financial market is a place, physical or otherwise, where buyers and sellers can trade the value of what they want to buy or what they want to sell based on supply and demand. There are different kinds of financial markets: stock markets, over-the-counter markets, money markets, primary markets, and so on. Depending on the market where they are traded, assets can be securities such as shares or commodities such as precious metals.
Sellers and buyers are generally public institutions (Hydro-Québec, central banks, etc.), private companies, individuals, and investment companies.
The importance of stock markets
Of all the different types of financial markets, stock markets are probably the most common. Chances are you're familiar, at least by name, with the Toronto Stock Exchange (TSX), the New York Stock Exchange (NYSE), or major U.S. stock market indexes such as the S&P 500 and NASDAQ. As an indication, according to Morningstar, the S&P 500 represents approximately 54 percent of the world's market capitalization. These are the main indexes observed by economists and financial specialists in North America and elsewhere.
Stock market indexes
A stock market index is a group of stocks that is used to evaluate a sector or specific stock exchange. Since it is an indicator of a basket of securities, it will generally vary according to the value of the stocks in the basket. For example, the S&P 500 index includes the 500 biggest publicly traded companies in the United States, making it possible to monitor the general stock market trend in that country, since it represents nearly 80 percent of U.S. market capitalization.
The information and data provided in this article are for informational purposes only and are not intended as financial, legal, accounting, or tax advice or recommendations regarding investments. Although they are deemed reliable, no representation or warranty, express or implied, is made as to the accuracy, quality or completeness of this information and data. The opinions expressed should not be construed as a solicitation or offer to purchase or sell the units referred to herein and should not be viewed as a recommendation. We encourage you to consult your advisor.