Stock market crashes result in significant loss of paper wealth in a short amount of time. While we may be able to partially offset a decline in specific stocks price or even in a particular segment of the stock market, a market crash affects the whole market, and often much or all stock markets in the world. They are also unexpected and abrupt so there is little that traders and investors could do to offset the effects.
One of the greatest fears of investors and traders when a market crash occurs is that it is the beginning of a bear market. Market crashes are not necessarily a harbinger of a bear market and bear markets need not necessarily involve crashes but the two may come hand in hand – and this is what we fear.
Worst of all is should the crash be the beginning of a Generational Bear Market.
So what should we do when markets crash? We’d be in the middle of one because by definition, it was something we could not have foreseen and avoided.
So the market is crashing, losing significant value every day. It is a bloodbath. Our wealth is down by 5, 10, 20, 30% in just a few days or weeks. The market would need to rise by DOUBLE that percentage amount for us to regain our original wealth. It seems like it’d take forever for us to grow our wealth…
Take a deep breath, close your eyes. Open them and log out of your account. Don’t panic, don’t look at your account.
Panic is one of the things causing the crash. Panic is the reason that many traders and investors lose money in the market. Remember: panic is NOT a trading strategy.
So don’t trade with panic!
You’re rattled. Even if you try to deny it, if you really look into yourself – and maybe you don’t have to look far – and you’re really honest with yourself, you are rattled. Everyone is! And it is only human to be so. We were all taken by surprise and we are all seeing sudden massive dives in our net worth.
We’re not sure what we should do. Everyone is pessimistic. The bear is suddenly looking so big. Owning stocks is suddenly looking like a bad idea. Some say sell now to avoid an even worse outcome. Some say buy now to gain even more.
Well…if you are not sure yet, just relax and do nothing.
Don’t buy, don’t sell, don’t check your trading account every other minute.
Doing nothing yet is the key do avoiding doing something rash that you may regret later on.
3. Increase your cash pile
Load up cash into your trading account to take advantage of an opportunity if it comes.
True crashes may just be the beginning of a correction or a bear market. But crashes are by definition caused by panic. And we all know how we humans can over-react when we’re panicking – especially in a mass panic!
Crashes may be an opportunity to grab good assets (stocks) at bargain prices. So if you have free, idle cash sitting somewhere else, you may consider putting them to work by buying discounted stocks.
4. Go into cash
No.3 concerns adding more cash for investment from other sources. No.4 concerns with liquidating your current holdings into cash.
If you have cash locked up in an underperforming or peaked performing stock that you think can be put to better use in another investment, then you may consider liquidating those holdings and put that cash to work in a better cash producing machine.
Holding onto this cash without investing it YET may also be a good move.
This goes without saying that such a decision should be taken with the proper plan.
5. Reinvest your dividends
If you have dividend paying stocks, this may be the time they really shine.
You may consider reinvesting your dividends if there are good deals rather than spending them.
6. Buy more stocks at discounts
This has been mentioned above but I think it should have a specific mention because of its importance.
When stocks are flying and everyone is talking about it, we often talk about buying dips, about how smart it is to buy stocks on sale. Well, a market crash is a time when stocks are on sale.
Yes, prices may fall further. No one can really tell where the market bottom is until it has formed and we are well on the way up. The BEST that we CAN do is predict POSSIBLE GOOD ENTRIES. I personally use support and resistance levels as areas where I will add more to my position. There are various ways to do it. Periodically investing regardless of what the market is doing is also another way of going about it. Buying at value prices another.
How you do it depends on YOU. But regardless of which methods you use, buying when the market is relatively cheaper should be better than when it is more expensive.
7. Look for good dividend yields
This will be most useful for dividend investors…
Dividend yield is a function of the dividend amount and our average stock price. Considering a static dividend (we don’t really like shrinking dividends do we), our yield will increase the lower our average price is.
Market crashes is an opportunity to get our favorite dividend cash cows at a discount and increase our yield.
This goes without saying that we should have done our due diligence on the companies beforehand.
8. Hold onto cash
This was already mentioned in No.4 but it is important enough to deserve a spot of its own.
If you’ve already amassed a pile of cash and are itching to buy all these stocks going at a nice discount, know that holding onto this cash may actually yield more. Not in terms of appreciation, but in terms of OPPORTUNITY.
Always have some cash around to take advantage of opportunities when they come about.
9. Recall your investing goal
What is the REAL reason you are investing?
The stress of seeing our net worth plummet and our portfolio deep in the red; and the pressure of deciding whether or not to average down our positions or buy new stocks that are on sale can be quite taxing on the mind. We may lose ourselves in the pursuit of an answer to these dilemma that we forget the reason that we are investing in the first place.
We set out to find ‘happiness’ but the process makes us the very opposite of the happiness that we seek. We seek ‘freedom’ but our decisions rob us of more and more of our freedom. This is the irony that many face not just in investing. One reason that this can happen is that along the way, we forget our original goal.
So what is your goal for investing? Are the things you are doing and plan to do getting you closer to that goal?
10. Have a long term perspective
If you are looking for quick cash, a 100% return in 3 months or something along those lines, then the stock market may not be the best place for you. While massive returns and quick money is possible, it is not very probable – especially in a crashing market.
Market crashes suck. If you are invested in February 2020 – especially if you have just recently entered the market – it would probably suck even more. Your portfolio would likely be red all over. Not an easy thing to bear.
However, even the most unlucky person who has entered the market at the very peak of the market every single time, over 20-30 years at least would still be making a lot of money. Much more than just putting that invested money in the bank for that period of time.
So look at the long term picture. Crashes, pullbacks and retracements come every now and again to give us a chance to buy lower. Bear markets can be challenging but also offer an opportunity to by even more at a discount. Over the long term though (think 10, 20, 30 years) the stock market will go up along with the growth in the human population and increasing need for services. And if you average down as the market falls, the period of time you spend in the red will be much shorter.
Time in the market is usually more important than timing the market..
Time in the market PLUS strategic timing of the market though, is likely even better still…