There’s no sugarcoating it: Nobody really likes to see the stock market crash. his folder becomes a constant reminder of the pain, tugging at every square inch of her emotions. you start to rationalize how to sell your shares and wait for the sale to end. “I’ll go back up” are the famous last words of many a retail investor.
The market is a daily compilation of instinctive reactions; it is not known how it might react to headlines or how long it will move in a particular direction before turning without warning. still, many people try to outperform the market, especially during down markets.
Want to know the real secrets to surviving a market crash? here they are.
1. take a long-term approach
It all starts with adopting a long-term mindset for your investments. You need to prepare yourself mentally for the volatility that is likely to show up at some point, especially if you own individual stocks. that it is “long term” try to be prepared for a horizon of several years when you invest because the market will have ups and downs; there will be bull markets and bear markets.
You risk going crazy if you review your stock portfolio every day (sometimes hourly), wondering if you should buy or sell based on what you expect the stock market to do next. The more you let that stress in, the more likely you are to try to trade around market activity.
a study showed that approximately 80% of mutual fund managers underperform the s&p 500 over five years. why? it could be because money managers are accountable to customers and their expectations and chase short-term returns to attract new investors. don’t do this instead, think of each share you own as a partnership with that company. observe the performance, management and long-term objectives of the company. don’t let the share price tell you how to feel about it.
It is common for stocks in general to trade lower during a market crash: the baby goes out with the bath water, as they say. so use a clash as an opportunity to hone in on unfairly sold gems.
2. use dollar cost averaging
Once you’ve identified a company you want to partner with (invest in their stock), don’t throw a giant lump sum at it. this is just another way of trying to “time the bottom” on a crash. You can look at that stock that’s down 50% from its highs and think, “It can’t go that low.”
oh yes you can. If a stock falls from $100 to $50 and you go all out, what happens if it continues to fall to $25? the stock is down 25 percentage points more (75% vs. 50%), but you are down 50%. some people call this “trying to catch a falling knife.”
Instead, consider a dollar cost averaging strategy to build your positions. you invest fixed amounts of money from time to time, slowly building up a position. You may not take the time to bottom out, but you’ll buy more shares as the price declines and help prevent your emotions from tempting you to do something foolish.
3. avoid margin debt
Using margin or borrowing funds to trade can be a deadly mistake in a market crash. Investors are often tempted to use margin because of the idea that they can increase returns, but in a crash, they can just as quickly increase their losses.
The dirty secret of using margin is that if your account gets low enough, your broker can make a margin call, where he calls in your loan, requiring you to add funds at short notice. They could even start selling your shares for you without telling you first, forcing you to sell at potentially significant losses. a market crash is much less stressful when you don’t have to think about margin calls; it’s often better to avoid the margin altogether.
4. diversify your portfolio
You’ve probably heard the common wisdom to “don’t put all your eggs in one basket.” this applies to investment; A market crash can drop stocks in an entire portfolio, but stocks don’t always recover to their previous highs. a market crash sometimes shakes speculative and low-quality stocks out of the top of the barrel.
If you invest in individual companies, you’re not likely to pick a winner every time. at some point, the action doesn’t work for one reason or another. Having a diversified portfolio of stocks will help ensure that one failure doesn’t sink your entire portfolio.
5. keep funding your account
Continuously funding your stock account can help eliminate a lot of stress at times like the last month and a half, when stocks seem to be going down every day. It can be challenging to decide whether to sell a stock at a loss or after you’ve given up significant gains to capitalize on another opportunity. you can use new funds to add to the stocks you believe in the most or pay for new investments without disrupting your existing portfolio.
Sometimes, investing for the long term is like cooking a good barbecue; the less you mess with it, the better it tends to turn out in the end. adding new funds for new investments will help you avoid the temptation to overtrade.