The Motley Fool

Worrying About a Market Sell-Off? Knowing These 2 Things Will Keep You Rational

I have a habit of keeping up with the developments in the global markets. Keeping up with my ritual, I came across an article yesterday with the headline screaming: “Dow, S&P 500 set for worst May tumble in nearly 50 years amid U.S.-China trade clash”.

For most investors, such news will likely put them off for the rest of the day. I know because that happened to me in the past.

Nowadays, however, such news does not really bother me much. After all, stock markets will always do what they want to do. As investors, we should not let our emotions to be swayed by such noises.

Clearly, to remain rational with this type of information is not easy. Here are two things I always tell myself when such a situation arises.

A market correction is inevitable

What moves up, must come down. Just as there are cycles in almost everything in life, there are also cycles in the stock market, within which market corrections and downturns are part of. Though the triggers of a downturn may be different each time (trade war, Brexit, credit crisis, etc), market sell-offs do occur quite frequently.

The good news is that almost all market corrections lead to a higher market price over the longer term. The only question here is when that will happen. As such, it’s important that investors own good companies that will continue to be profitable during the bad times.

Knowing that market correction is inevitable will allow investors to remain rational during such a difficult time. What’s more, investors might actually benefit from it if they do the right thing, which leads me to the next point.

It’s a great time to buy

Market sell-off is a fantastic time to buy great assets cheaply since many companies will be selling at lower valuations. To benefit from it, investors must have a plan of action ready. Such a plan should cover questions such as:

  1. Do I have a watchlist of stocks to buy?
  2. What are the prices to buy these stocks at?
  3. What’s the capital I’m willing to commit for each stock?

The bottom line is, having a plan will keep you focused on what matters — buying great companies at bargain prices and keeping them for the long-term.

The Foolish conclusion

A stock market correction is inevitable. Thus, investors should make full use of the opportunity to buy good companies at bargain prices. And for those who are fully vested, do remember that “this too shall pass” in the long run.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.