3 Key Moves to Make During a Stock Market Crash
The Covid pandemic, political conflicts, and economic uncertainty have not only caused public health crisis but economic unrest as well. Stock markets around the world have experienced dramatic fluctuations and investors are on edge. Contradictory advice abounds about what you should do with your investments during a stock market crash.
Should you buy up stocks while they’re cheaper during the bear market? Should you pull your money from the market to avoid bigger losses?
If you’re unsure about what to do during a stock market crash, keep reading for some ideas about how you can survive the unpredictability and make it through the stock market crash.
1. Diversify
Even in the face of a stock market crash, many basic investing principles still apply. One way that you can protect yourself is by diversifying your investments.
Stocks can be riskier than some other securities because their value can fluctuate greatly (especially during a stock market crash). Stockholders can lose — or earn — a great deal of money. Investing in just one stock is very risky.
This is why it’s good to distribute your money in different types of investments or in securities that are themselves diversified. Consider investing in exchange-traded funds or mutual funds. These securities contain a diversity of stocks and other financial instruments.
Portfolio diversification can protect you from risk and improve your long-term returns after the stock market recovers.
2. Re-evaluate your risk tolerance
Your risk tolerance should take into account a number of factors, including your time horizon, investment goals, income, asset class preference, and other dynamics. The only thing that is relatively certain in uncertain coronavirus times is that some aspects of your life probably look a lot different now than they did six months ago.
If you or loved ones have lost work, become ill, or have to take on additional expenses for a different reason, your risk tolerance has probably changed. You may not have as much money to invest right now. You may be in an emergency situation and suddenly need access to previously-invested funds.
Whatever your situation is, be honest about it so that you can make the best financial decisions for yourself during the stock market crash.
3. Maintain a long-term view of your investments
Especially in today’s volatile market with the uncertainty provoked by the Covid pandemic, war, and other disasters, it can be tempting to sell your stocks when you see a horrifying drop.
Many investors believe that they are avoiding larger losses down the line when they sell, but in many cases they are simply locking in their losses during a stock market crash.
Making emotional decisions when investing is a sure-fire way to lose and to deviate from your long-term goals during difficult times.
Long-term thinking is crucial to becoming a smart investor during a stock market crash for a number of reasons. Long-term investing can have tax benefits, can be built up gradually over time, and is generally more stable. Investors may experience fluctuations over the short term.
But, historically speaking, the market has always recovered. This is why long-term investment tends to yield greater returns despite even extreme short-term volatility during stock market crashes and downturns.
During a stock market crash, it might be a good opportunity to buy stocks at a cheaper price during the bear market.
Although there is a risk that certain companies and sectors might not recover, many investors recommend snapping up securities that promise growth during stock market crashes.
The bottom line
If you’re unsure about what you should do during the crisis, don’t worry, you’re in good company.
However, by integrating diversification, reevaluating risk tolerance, and practicing long-term thinking, you can begin managing your investments intelligently.
Investigate the rest of our financial education library to learn more about how to keep your financial fitness in check and discover simple ways to save money.
