An economic crisis makes it difficult for the business environment to thrive. It affects producers, consumers, and investors. It plays a domino effect and affects employment, consumer spending, profits, credit negatively. It leads to the rise of economic bubbles only to bring a crash soon. Plus it plays ping pong with your emotions.
The world faced a massive economic crisis in 2008. Saudi Arabia faces an economic crisis as the price of oil has dropped considerably. As a retail investor, you are not insulated from crises even in other parts of the world. You can get affected by financial crisis anywhere in the world as the financial and business world is closely connected. It is therefore, important to be aware and take necessary steps to avoid a negative effect on our portfolio. As a long-term investor, taking the right actions during an economic crisis will ensure your portfolio grows and gives appropriate profits.
You get to learn a lot about yourself, personal finance and world economics if you pay attention to the crisis. You learn not to panic and keep your long term portfolio with you even if the prices drop.
You understand the interplay of various economic factors and how they affect personal finance. As a long term investor, it is important for you to understand all these factors to be a successful investor. Really 🙂 I think more important is that you understand that these things are not in our control – so don’t focus on such events, focus on your long-term plan…
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An economic crisis creates chaos and there is too much emotion at play – panic, fear of loss etc. People sell off good shares in a crisis at lower prices as they feel shares will lose value. Many people do not invest and prefer to keep the cash. This just results in value erosion. But a sensible long-term investor can learn to control behavior. He will benefit if others are risk averse. They should not buy stocks that are really low priced during the crisis but have not real value. They can learn to be disciplined, patient and understand the market better.
A long term investor can reap in lots of benefits if investments are done smartly. For example, when the financial crisis hit the US, value of real estate plummeted. Some smart investors who had invested in real estate during the crisis are enjoying value appreciation in their assets as now prices are stable and real estate has recovered.
In the case of equity, a long-term investor. He can buy equity mutual funds or shares when the markets are down and hold on to them till the markets are stabilized or do an averaging by adding on mutual funds that he already has to bring the overall cost of his holding down. Even your existing Mutual Funds SIPs will help you to accumulate more units.
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Having a sound investment strategy is not easy but focusing on the long term, using common sense and investing as per competence will help us to be successful investors whether an economic crisis or not.
Please share your experience in the comment section when the last crisis hit us….