Do stocks always go back up after short or longer falls? So far, the stock markets have always recovered from big and small drops. This is true for markets overall. However, individual stocks might lose their value permanently and even go to zero.
This is why you should focus on owning quality companies that have established their places in the markets and have a bright future. An easy way to do this is to buy an index fund that contains a lot of different stocks. If this is your strategy, your risk is much lower compared to owning individual stocks.
Why do stocks go back up after falling?
The purpose of companies is to make profit for their shareholders. If a company is making a profit and continues to do so, the price of the stock might fall because of overall market conditions. Those can be herd behavior and fear that affect investors at the moment, but don’t really have a long-lasting impact on the company itself.
Sometimes either companies or the environment the company is operating in changes too much, and the company fails to deliver the results investors want. If this is the case, the stock price might not recover to what it used to be.
Another reason stocks go back up after falling is that something has changed for the better in the company. Maybe the whole industry took a turn and therefore all the companies are doing better.
How to play it safe with the stock market
If you want to play it safe and minimize your risks, remember to diversify. When you hold a lot of different stocks, your risks are diversified if one company performs poorly. This can be done either by buying all the stocks individually or by investing into already diversified index funds.
Keep in mind that keeping your assets in cash, dollars, euros or whatever currency also contains its own risks. Inflation is eating the purchasing power of your money slowly but surely, and not always so slowly.
Having a balanced portfolio is the best way to keep your purchasing power and assets safe. This can be done purely with different stocks, or you can also include bonds, commodities, and real estate to your portfolio. Whatever suits your personal strategy the best, there is no right of wrong way to do it.
I have a post about how to invest in commodities, you can read it here.
Should you sell your stocks now?
Good answer, if you are wondering if you should sell your stocks now, is to think, would you buy the stocks today for the market price? If the answer is no, then you could sell your stocks and transfer your money into a more pleasurable asset.
If the answer is yes, then you probably should hold onto the stock. This is an easy way to find out if you should sell the stock or not. If you are still unsure, do some research about the company and markets in general, until you have made up your mind.
When considering if you should sell or keep the stocks, it is good to also think about taxes. If your position has gained a lot since you bought them, you might have to pay taxes on the profits.
If stocks always recover, why do people panic and sell?
Panic selling and herd behavior is a common thing among new and inexperienced investors. I’m not saying that experienced investors aren’t guilty of doing this as well. I would say the more you know about markets and investing, the more calmly you can handle sudden events in the market.
Panic selling is a combination of fear and herd behavior. When stocks are falling, the news is full of negativity from the markets. This will fuel the fear of investors even more. This goes both ways, when stocks are rising and there seems to be no end to it, the news is all rainbows and sunshine.
The lack of knowledge about the markets and the instruments people have invested in is probably the main reason people panic sell their holdings.
Will the stock markets rise forever?
Like I mentioned before, the main purpose of companies is to create profit for shareholders. Therefore, stocks are supposed to rise and create profit. If a company can not do that, another will take its place in the markets.
This being the case, the stock markets in general should be rising year after year, and if they fail to do so, investors will find other options to invest their money. Some companies will die off and new ones will grow up and take their places.
Even if the companies stayed the same, and inflation was around 1 to 2 percent, stock prices would technically be rising at the pace of inflation. Due to declining purchasing power of the currencies, stock prices would on paper increase.
The company would be as valuable as it was the year before, but the money used to buy the shares is worth less. This would cause the prices of stocks to rise, even, if they are as valuable as before.
This is rarely the case, because of the prices in the markets rarely represent the real value of the stocks.
What to do if stocks fall?
If you are a long-term investor, sudden drops, and even longer bear markets can be used as good purchasing points. Lowering your average price and “buying the dips” is a good way to add more stocks to your portfolio.
Investing for the long-term, you should not be too concerned about the events on the market. No matter how bad the situation seems, so far, the markets have recovered from everything. This, however, is not a guarantee of future returns, but in today’s world, nothing is sure. That is the point of investing; you risk your money to get the returns.
In conclusion, if you have a diversified portfolio and you are a long-term investor, you should not be too concerned about sudden moves in the markets. The purpose of companies is to make profit for their shareholders. If they fail to do so, they will be replaced by companies who can do that.
I personally like the strategy that goes as follows: buy everything and hold it forever. Some of the positions might go to zero, but the winning ones should cover your losses and provide nice returns over the years.
More investing questions answered in this post.
Other investing-related posts can be found here.
Hopefully this was helpful to you, have a nice day.
This is not investing or financial advice. Past returns of the market are not a guarantee of future returns. Always do your research before risking your hard-earned money.