Investing
Navigating a Stock Market Crash: 5 Ways to Stay Afloat and Thrive
Some people panic and feel anxious, sad, or even pessimistic when the numbers go down. It’s a common and normal reaction as it can be terrifying when the possibility of losing significant money is on the horizon.
Yes, it can be overwhelming especially as it could be a complex and volatile environment. But know that you can equip yourself with knowledge, stay focused, and manage your portfolio better.
What is a Market Crash?
A market crash is determined when the value of financial assets has a sharp and sudden decline in stock prices. It can be caused by different factors including economic downturns, geopolitical events, or systemic risks in the financial system.
Ways to Thrive in a Stock Market Crash
1) Know What You Own, and Own What You Know
To succeed in the stock market, it's important to understand the basics, conduct thorough research, develop a solid investment strategy, and stay disciplined and focused over the long term.
An investment thesis can help guide you in your strategy. Having a clear one allows you to know the company, industry, or market being invested in, as well as an analysis of various factors such as financial performance, competitive landscape, and growth prospects.
By having a such guide, you can better manage any high emotions and impulsive decisions during a market crash. Knowing your strengths and weaknesses will help you decide which one is worth holding.
2) Rebalance your Portfolio
Portfolio rebalancing is the act of reviewing and realigning an investor’s asset allocation. When a market crash happens, it’s a crucial period for you to take a look at what you have. Review your portfolio, determine trades needed, consider tax implications, execute trades, and then continue to monitor your portfolio.
An example of how to structure a bulletproof portfolio:
- 15% cash - this includes liquid cash and money in the bank to cover living expenses and emergencies
- 15% broad-based market index ETF- this can be a broad market indexes fund like S&P500 ETF (SPY) or Vanguard Total Stock Market ETF (VTI).
- 30% blue chip stocks e.g. AAPL
Some criteria to look out for:
- Market cap- 50 billion and above.
- Profits and earnings for 3 consecutive years
- Assets > Liabilities
- Good management
- 40% high growth disruptive and innovative companies e.g. TSLA, SQ
3) Keep a Cash Reserve to Invest
Investors should set aside investible cash to put in so they can take advantage of opportunities such as a market crash where prices go down. Ideally, 10-15% of their gross income is saved and invested for long-term goals financial goals. Of course, there are several factors to consider for each individual such as financial goals, risk tolerance, and current financial situation.
Morgan Housel is a financial journalist and author who wrote "The Psychology of Money", a book that delves into the intersection of psychology and finance. He came up with a roadmap for using cash available during a market crash.
4) Investing in Index Funds
This type of investment can offer broad market exposure, it’s typically less expensive and has a passive management approach. Index funds are available in various asset classes such as stocks, bonds, commodities, and real estate. They’re not only a great option for beginners but also offer easy diversification for investors.
5) Look Long Term
Take a deep breath to avoid panicking during a stock market crash. A downward movement is always temporary and will eventually recover. Investors should have a strategy such as looking at the long term rather than panic selling. If you’re a new investor, make sure to understand your risk tolerance and know your limits. This will help you have a better response to any market changes.
Thrive Through the Market Crash
A stock market crash like the one during the US recession, and the worldwide COVID-19 pandemic causes doubts and fears to surface. Any individual looking to invest or currently investing should always consider the common possibilities during a market crash. Holding on to your stocks may benefit you better but this is possible only if you prepare an effective strategy. Ask your financial advisor about certain scenarios or someone whom you know has been investing for some time already.
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