What To Do When the Stock Market Crashes
Synopsis
Stock market crashes terrify even the most seasoned investors. It is horrible to see your savings shrink by thousands within days. The first thing that might come to your mind is to sell everything…
Stock market crashes terrify even the most seasoned investors. It is horrible to see your savings shrink by thousands within days. The first thing that might come to your mind is to sell everything and stop the bleeding. Panicked decisions during stock crashes often do more harm than the crash itself, though. History has often shown that those investors who remain composed and apply intelligent approaches recover way sooner and amass greater wealth eventually.
Do Not Do Panic Selling
Your emotions run high when you see red numbers everywhere. The fear makes you sell immediately and save what's left. This reaction costs people more money than almost any other mistake. When you sell during a crash, you lock in the losses for good. Those stocks cannot recover for you anymore.
Marketwide crashes have been quite regular throughout history. In 1987, stocks plunged 22% in a single day. During the 2008 crisis, almost half the market value was burnt. The 2020 pandemic crash felt devastating. Yet, each time, the market recovered. Those who sold during the panic missed the recovery gains.
Morgan Stanley researched 120,000 investors in market crashes and found that 93 per cent of those with solid financial plans stayed on track to meet their goals. When portfolios fell 16 per cent, the chances of reaching goals fell only 2 per cent. Selling in a panic proved far more damaging than staying invested. Investors who sold into cash during the 2008 crisis and remained out until 2009 lost about 20 per cent of their money compared to those who held steady.
Check Your Investment Timeline
How soon you need your money matters more than the crash itself. If you'd planned to retire in twenty years, today's crash barely impacts your long-term goals. Markets have always recovered, given enough time. Financial experts with firms like NerdWallet and Morningstar say young investors should consider crashes as opportunities, not disasters.
People at or near retirement have different concerns. If you need your money within five years, having too much in stocks creates real problems. A crash right before retirement can delay your retirement plans. That is why financial experts suggest gradually moving money into safer investments as you age.
Your investment mix should match your timeline before any crash happens. If you built the right mix already, a crash requires no action. The bonds and cash in your portfolio provide stability while stocks recover. Morningstar research confirms that investors with properly balanced portfolios can handle crashes better compared to those who hold only stocks.
Look for Buying Opportunities
Crashes put quality companies on sale. Businesses too expensive yesterday have become bargains today. If you have excess cash available, crashes offer the best buying chances you may see for years. Warren Buffett built much of his wealth by buying during market fear.
Names of companies you have already researched and wanted to own: Crashes drop good and bad companies together. Those businesses that sustain solid profits with smart management will survive and thrive. Many financial institutions, such as Bank of America Merrill Lynch and Fidelity, advise buying shares of these companies at discounted prices during crashes.
Dollar-cost averaging is particularly effective in the case of crashes. Keep investing the same amount at periodic intervals, irrespective of the prices. When markets fall, your fixed amount can buy more shares. Research by Fidelity goes to show that investors who continued with their regular contributions through the 2007-2009 bear market saw their portfolios recover and increase significantly. Analysis by SmartAsset proves that dollar-cost averaging performed better during the Great Recession and the 2018 market correction.
At Inspirepreneurs Magazine, covering entrepreneurship, business failures, and the human stories behind the world's most ambitious founders. She writes at the intersection of strategy and storytelling.
