(If you prefer to watch the Youtube video instead, watch it here)
Investing in the stock market has been a nightmare this year. The S&P500 and Nasdaq are both in correction territory (a drop of 10% or more), and the Dow Jones is just a few points away from joining them. A stock market crash can be frightening, particularly for first-time investors. And so when the market just keeps on dipping, as it is right now, investors on the verge of panic have a lot of questions. Some are very good questions while others, not so much. In this article, we’ll answer four of the most frequently asked questions about stock market crashes.
- Related:
- What Does It Mean When A Stock Is Shorted?
- How To Protect Your 401(k) From A Market Crash in 2022
- What Happens When Interest Rates Rise?
- When Should You Sell A Stock?
- How to Prepare for a Stock Market Crash In 2022
- What Should You Do In This Stock Market Crash?
In This Article
1. Why is this happening?
The reason this is happening is a complex combination of the following:
- High inflation
- Anticipated interest rate hikes
- Instability in Ukraine and Russia
- A stock market that was overvalued to begin with
- And many other reasons, including a bearish market sentiment.
We can spend hours exploring the many reasons why this is happening. But, this is the wrong question to ask.
And this is because market sentiment is constantly changing. Sometimes it’s incredibly bullish, and everyone is buying up all they can, pushing prices and higher, even above their intrinsic value.
And then there are times like these, when the sentiment turns negative for just any reason, including the reasons we mentioned earlier, like inflation, rising interest rates, geopolitical tensions, and the like.
So the market never falls because of just one reason. It’s often a result of multiple factors, most of which are not even reasonable due to human psychology and emotion.
Peter Lynch, one of the prominent investors in the late 80s and early 90s, noticed a correlation between investor emotions and the stock market performance.
In the video below, he explains how investors, after a long work week, would watch a lot of cable TV on the weekend, get scared and sell stocks on Monday.
This has been happening a lot recently. Investors are watching everything that’s happening in eastern Europe, they’re keeping an eye on the “inverting” yield curve and talking about how a recession is imminent.
Peter Lynch says that market corrections and bear markets will always happen, and he’s not concerned about what happens in the short term. What he knows for sure is that, in 8, 16, 20 years, good companies will have grown their earnings immensely.
And that’s all that should matter to you as well.
The next question investors often ask is:
2. How long is this downturn going to last? When is the bottom?
This is yet another wrong question, the reason being: nobody knows. CNBC won’t tell you; investing gurus won’t either; even YouTubers cannot tell you exactly when the market will bottom.
It’s almost impossible to time the bottom of a market. Trying to catch the market at its lowest dip so you can buy won’t work. And that’s because such a mentality always convinces you that the market is not yet at its bottom.
“It will keep on dipping,” you tell yourself.
And so you keep waiting; the market hits the bottom and starts to rise again, and by the time you realize it, you’ve already missed out on the opportunity.
So asking when the market will bottom is not a good question to ask.
However, here’s a good question investors ask: what should I do now that the market is crashing?
3. What should I do?
This is one of the most popular questions asked during a market crash.
Your key priority during a market crash is to stay calm. Panicking will only lead to poorer decisions which could further damage an investment portfolio. That’s why I recommend doing nothing, at least for a while. Doing nothing will help you stay calm and collect your thoughts.
Here’s another thing you can do: consider buying the dip if you have extra cash. To be able to do this, you need to see the market crash for what it is: an opportunity. Market crashes provide opportunities to buy high-quality assets at discounted prices.
Another thing you can do is continue to diversify your portfolio. Holding a variety of asset types can help to reduce the risk of losing money if one sector of the market takes a hit.
I’ve written an extensive article on the 5 most important things you should do in this market crash. Check it out if you’d like to learn more.
4. Should I sell my stocks?
Many investors are wondering if they should sell their stocks during a stock market crash. The answer to this question depends on a number of factors, including an individual’s investment goals and risk tolerance.
If you’re about to retire and would like to rebalance your portfolio to make it less risky, then you’d be absolutely justified to sell.
However, selling out of fear is never a good idea. As we mentioned earlier, stock market crashes do not last forever. If the market recovers while you’re still on the sidelines, you might miss out on great opportunities.
Here are the exact times when you should sell your stocks.
Conclusion
Previously asked questions by investors during stock market crashes can not only guide us on what to expect but can also help us learn exactly what to do when a crash finally happens.
During periods of volatility and market downturns, it’s important to remember the tips listed above in order to protect your investments and also come out ahead.
A stock market crash can be a scary time for investors; however, with these simple strategies, you can sleep better at night.
