It’s ironic how everyone is thrilled when products are on sale at your neighborhood store, but when stocks are on sale, it’s seen as the worst thing that could happen.
Since the beginning of this year, the stock market has given us many opportunities to be happy, or glum, depending on how you look at it.
For instance, the Dow Jones is currently down 6.85%, the S&P500 is down 9.33%, the Nasdaq is now in correction territory, and the lowest of them all is Bitcoin, which has lost half of its value from its all-time highs.
And what’s everyone’s reaction? People are panicking left, right and center. Even famous Youtubers(like Meet Kevin) are selling out of their entire portfolios.
During times like these, when the market just keeps dipping, and there’s panic everywhere, the most common question from investors is what should I do in this stock market crash? Well, this article will tell you exactly what to do in this, and any other market crashes that you’ll encounter in the future.
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In This Article
1. Do nothing, at least for a while.
The first thing you should do is nothing, at least for a while. And here’s why this is important:
We don’t like to admit it, but as human beings, we’re all subject to the same human nature.
When we see fear, and we see other people sell out, we feel we should do the same. (Unfortunately) It’s tough to react differently.
So I encourage you to do nothing, at least for a few days. Don’t even look at your portfolio. Because fear is real out there, and you’re not immune.
During these fearful times, the worst thing you can do is look at your portfolio, see how much you’re losing, panic, and then sell.
Remember, you can only make a loss on your investment when you sell.
The second thing and probably the most important thing you should do in every stock market crash is this:
2. Remember the basic truths
And here are the truths to always keep in mind:
Truth No 1
Market corrections are inevitable, but they never last forever. For instance, the graph below shows the times when the S&P500 fell and then got right back on its upward trajectory.
Truth No 2
It’s impossible to time the market. If investors could time the exact peak and bottom of the market, investing would be effortless, and everyone would be a billionaire.
The third thing you should do during a stock market crash is:
3. Know what you own
During times like these, it’s very easy to forget that when you buy a stock, you’re actually buying a business and not just the ticker symbol.
So what you need to do is have a look at the underlying business and ask yourself the following:
- Does it have solid fundamentals
- Is it still growing?
- Is the company innovating?
- Will the company still be relevant 10 years from now?
If the answers to these questions are yes, then hold on to it.
The fourth thing you should do is:
4. Think long-term
As Peter Lynch said, he doesn’t care about how terrible macroeconomics look. Instead, what he focuses on are the long-term prospects of good companies.
I like listening to this part of his speech every time I need to gain perspective:
The fifth and final thing you need to do is:
5. Buy the dip
See the situation for what it is; an excellent buying opportunity.
Here’s the best piece of advice I’ve ever heard about investing. It’s from Warren Buffett, and he says:
“Be fearful when others are greedy and greedy when others are fearful.”
During times when there’s euphoria in the market, when everyone is buying, saying that prices will go to the moon, that’s when you should be cautious.
But during times like these, when there’s fear all over, and everyone seems to be bailing out of the market, this is when you should be nibbling in a bit more and scooping up some of your best companies while they’re on sale.
I know it’s difficult to overcome your fear of investing in a falling market. However, if you can see it as a huge sale, you’ll quickly realize that market crashes are the times when fortunes can be made.
So if you have money set aside that you won’t need for a long time, load up on some of your high conviction stocks.
Buy good companies that generate huge profits despite recessions and other macroeconomic challenges.
And also, avoid speculative stocks that could go bankrupt if we end up in a recession.
Remember not to use money from your emergency fund or any other funds you’ll need in the near future.