Many inexperienced investors might not be aware but the stock market crashed several times in the previous century. So, stock market crashes aren’t anything new. Furthermore, market downturns are unpredictable and sudden, with no way of knowing when it can happen. Still, factors such as the coronavirus pandemic have been the driving force of recent market turmoil. However, with or without a global pandemic, market dips are common.
Usually, with continued economic growth as well as profits by firms, markets tend to rise. Occasionally, nonetheless, stock market crashes occur when the market index drops dramatically within a day or more of trading.
In such cases, investors can either choose to sell their positions and lose money or wait it out. In reality, market downturns are common and can result from various factors. But based on history, we can determine how long crashes or a stock market correction is likely to last, which can help investors make informed investment decisions.
While there are numerous factors that can cause a market crash, in most cases, it results from frightened investors. For example, if a sudden economic event, calamity or crisis occurs, investors panic. When news of the global pandemic broke in March 2020, investors started to panic, which saw a rapid global financial downturn. However, the market regained strength relatively faster, closing the year off with record highs in all the main indexes.
Typically, market downturns occur at the end of a prolonged bull market, where there’s illogical greed that drives stock prices to unsustainable levels. At this juncture, the price inflation goes above the real worth of organizations measured by earnings.
Stock market and crucial details
Nonetheless, the most recent crashes resulted from a technical development referred to as quantitative trading. It uses mathematical algorithms in computer programs to trade stocks. This factor has significantly grown and replaced investors, greed or panic as causes of market downturns.
Interestingly, market downturns can cause a bear market – when the market drops 10% past a correction for a total decline of 20% or more. Besides, a crash can lead to a recession.
We should remember that stocks act as a financial boost used by firms for the management and growth of their businesses. Thus, if the prices drop radically, the ability of organizations to grow declines. This may mean having to lay off workers to avoid going bankrupt. As the stock market decline surges on, it’s more likely that the economy will decline and lead to a recession.
It is very important to prepare for the possibility of a market crash and craft a backup plan for when it happens. Let’s have a look at 5 tips.
5 tips to prepare for a crash
First and foremost, don’t panic. Undoubtedly, this is easier said than done. Still, it’s possible to hold your ground during a market crash and reap benefits. It is true that most investors lose money when the stock market tanks due to sheer impulsiveness. Of course, it is easy to panic when you consider the possible hit your investment portfolio may take but remember crashes are only temporary.
In March 2020, stocks lost 30% of their value. But before the end of the year, the market regained its ground even though a global pandemic is still ongoing. Consequently, a market crash shouldn’t cause you to act impulsively and sell your stocks in an attempt to escape before the stock values tank completely, as this is just temporary.
Investor’s opinions and important advice
The second piece of advice is to take advantage of discounted stocks. Unfortunately, it’s a common misconception that stock market crashes are bad. Thanks to such cases, investors get the opportunity to purchase quality stocks at lower prices.
Usually, you can make a fortune during a market dip. All you have to do is to invest in stocks whose prices suffered losses. It’s desirable to keep a wish list of the stocks you would like to own and prepare financially, so you are ready to make a move when disaster strikes.
The third tip is to avoid selling your stocks. As a reminder, you will lose money if you choose to sell your investments for less than what you paid for them. You should try not to sell your stocks unless you really need the money.
But if you really need to sell your stocks, you need to do your research and determine the purpose, strengths and weaknesses of each investment in your portfolio. It makes sense to keep this information in a file so that you don’t end up selling a lucrative long-term investment due to panic during a market crash.
Let’s have a look at two more important tips. Our fourth tip is that if the stock market crashes, it is desirable to diversify your investments.
You should keep in mind that when the market dips, the outcome may vary. Nonetheless, if you invested your money across multiple nest eggs, the result may be in your favor. For example, 401k plans or target-date retirement funds offer diversification. So, if the market dips, you can trust your portfolio to ride the storm, although you may still experience short-term impacts. You can invest some of your money in an S&P 500 index fund and some in a diversified bond funds.
It’s crucial to have a well-diversified portfolio, that can withstand a downturn rather than having one that is concentrated in a few blocks. Consequently, it’s important to continually review your portfolio and make changes, even if it means getting rid of some stocks.
Last but not least, if the stock market crashes, it is desirable not to act alone. It’s great when the stock market is at an all-time high, and your stocks are going up in value. Nevertheless, it’s common for ill-judged techniques to steer you in the wrong direction when it gets rough. In such cases, you should consider getting professional advice from a financial advisor.