It’s ironic how when things are on sale at your local stores, everyone is happy. However, when stocks are on sale, it’s seen as the worst thing that could ever happen. The last few weeks have seen securities in the stock market plummet, especially those in the tech space. If your portfolio is on the descent, you might be in panic mode, wondering what to do. Here is a list of 5 things to do when the stock market crashes.
In This Article
1. Do nothing.
Market corrections are expected and inevitable. It might sound like a cliche, but the worst thing you can do is panic sell. The only time you can make a loss on your investment is when you sell.
On the other hand, the best thing you can do for your investments during a stock market crash is to hold on tight.
Doing nothing for a while will help you stay calm and relaxed. The fewer emotions you have during red days, the less you’ll be tempted to panic sell.
If possible, don’t look at your portfolio for a couple of days.
2. Remember that corrections are inevitable and never last too long.
You might remember the March 2020 stock market crash that resulted in the MSCI World Index declining by 34%. What happened after this? The market bounced right back and continued with its upwards rally.
2020 was one of the best years for stock market investors. If you sold amid the March market crash, you would have lost about 17% returns that year.
3. Know what you own and why.
Every stock investment you make should have a reason. Be sure that you know each of your assets and why you own them.
It’s essential to perform extensive research on a stock to identify its opportunities, strengths, weaknesses, and threats before you buy. Have your most compelling reasons for buying written down somewhere.
When there’s a market crash, refer to your notes. Check if your reasons for buying are still valid and will hold in the long term.
During a market crash, ask yourself the following questions:
- What was so compelling about this stock that made me buy it?
- What long-term opportunities did I see for the company?
- Are the opportunities still valid?
- Is my portfolio well-diversified?
If you have solid answers, then keep holding. This will help you avoid an emotional reaction that could lead to selling good companies.
4. Buy the Dip!
See the market crash for what it really is – an opportunity. Market crashes offer excellent buying opportunities.
It’s challenging to overcome your fear of putting money into a falling market. However, market crashes are the moments when fortunes can be made.
If you have money set aside that you won’t need for a long time, load up on your high conviction stocks while they’re on sale.
Buy good companies. They’ll always continue to have huge revenues and high earnings. And for this reason, their market prices will rise in the long run despite emotional sell-offs and corrections.
Avoid buying speculative stocks or companies that could go into bankruptcy.
Remember NOT to use your emergency fund or any money you’ll need any time soon.
5. Don’t try to time the market; Keep nibbling in.
During a market crash, many investors decide to wait and try to catch the market at its dip. The problem with this strategy is that when the market gets to its lowest, they don’t realize it because they’re still waiting for it to fall even further.
Once that opportunity is gone, stocks begin to look expensive for them to buy in. Such investors end up not buying at all. They entirely miss out on excellent buying opportunities.
Since it’s almost impossible to catch the market at its lowest dip, the secret is to dollar-cost average. This means investing a small portion of your money every day throughout the crash.
This way, if the market keeps dipping, you can catch a new dip every day. If the market bounces back, then you didn’t miss those opportunities.
You can even continue buying as it bounces back until it gets to your buying target, beyond which the stock becomes overvalued.
Looking at your portfolio decline is scary. However, if you can manage market crashes wisely, you stand to make lots of money.
The most important thing to remember is to resist the urge to sell. Keep holding good companies.
The next best thing to do during a stock market crash is to buy your best stocks while they’re on discount.
Market crashes offer once in a blue moon opportunities. Don’t miss out.