The declines on the Warsaw Stock Exchange, which have been ongoing since the beginning of June, have already taken about 25 percent of investors’ funds from their wallets. Although they are already very worrying for many, they should remember the basic rules that can protect them from large losses. If you are interested in investing in the stock market, learn a few basic rules that will help you minimize losses during a bear market. We believe that the key to success is investing safely in the long term.
Rule number 1: Don’t panic
When it comes to investing in the stock market, emotions are a bad advisor. They usually tell you to buy shares at the peak of the bull market, when everyone else is doing it, and the valuations of companies are already at very high levels. And on the other hand, when indices fall sharply, emotions make you get rid of shares in panic. Such a scenario is repeated especially among novice investors who invest their savings directly on the stock exchange or in equity funds with the hope of quick profits.
Meanwhile, they should look at their investments in a completely different way. When declines come, first of all, you should not panic, but look at everything with a cool eye. Because maybe this is the perfect time to go against the tide and buy shares at a promotional price.
Rule number 2: Own strategy
The basic mistake is to start investing without your own strategy and a few assumptions that you should make before you buy shares. Then it is much easier to control emotions and listen to ominous voices about the impending crash with distance.
It is primarily about the so-called investment horizon, i.e. the period for which the investor intends to hold the shares of a given company. In general, the shorter it is, the greater the risk of losses, because after the declines it will have less time to make up for them. Therefore, it is worth considering long-term investing – then the declines do not look so scary, and what’s more – you can use them to increase your exposure to shares. Of course, also under certain conditions, which we will discuss in a moment.
Rule number 3: Don’t invest in what you don’t know about
Your own strategy is also related to the fact that before buying shares, you should familiarize yourself with the company’s activities and the industry in which it is present. This can be boiled down to a well-known saying by investor guru Warren Buffett, who used to say that he doesn’t invest in what he doesn’t know about.
Knowledge and assessment of the economic situation on a given market will allow the investor to confirm his decision to buy shares or to withdraw from it. It is important that the decision is your own, not dictated by the hints of your friends. And here, by the way, another rule: never brag to others about what companies you have in your portfolio, how much you earn or lose on them, etc. Unnecessary suggestions or advice from them can cause you to lose both money and friends.
Principle number 4: Fundamentals matter
This is probably agreed by everyone who looks at investing in the long term. Choose companies that are strong on their markets, with good prospects, good financial results, whose shares are also undervalued. For this, you will need knowledge of basic indicators such as P/E or P/BV. It is also important which company regularly pays dividends and whether its policy in this area is sufficiently transparent.
Armed with such knowledge, an investor today, when most people nervously look at the charts, will find companies that look very attractive and it is worth considering buying them in the long term.
Rule number 5: Never invest all your savings in the stock market
A mistake visible to many people, especially at the peak of the 2007/2008 bull market, was that tempted by high, historical rates of return, they invested all their funds in shares or aggressive funds. There was no shortage of people who additionally supported themselves with the so-called leverage, i.e. a loan for investments. No wonder that when the declines began, they fled the market in panic with losses.
Meanwhile, you must never invest all your savings in stocks or stock funds. One of the well-known rules of safe investing says that only one-third of financial surpluses, i.e. money that the investor will not need for the next few years, should be directed into shares. In this way, he can afford to assess the situation coolly, buy more shares and look for investment opportunities.