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There’s an old adage on Wall Street: if you don’t sell it, you haven’t lost it. In other words, the value of your investments doesn’t really matter until the day you need to cash out, so don’t worry about the ups and downs in the meantime.
It’s cold comfort when your portfolio has lost 20% or even 30% of its value in a stock market crash. Just look at the market this month and you’ll know what I mean – or think back to early 2020 when the Covid-19 pandemic started.
Stock market crashes are inevitable and they really hurt. So what to do in the event of a crash? Get the most out of it – here’s how.
1. Do nothing during a stock market crash
If you believe in your investment strategy and the assets in your current portfolio, don’t change your plans unless you have a good reason. When you were building your portfolio, after all, you might have thought of a stock market crash like this.
People who panic sell during a crisis often regret their choice. Take those who jumped ship in the spring of 2020, when the S&P 500 fell more than 30% in a very short time. They were already regretting their decisions in the summer of 2020, when the early Covid market losses were erased by the lightning-fast pandemic rally. And by the end of the year? They had missed 65% gains since the low of the crash.
2. Go shopping during a stock market crash
Stock market crashes are often the result of events like the emergence of Covid-19 or the announcement that the Federal Reserve will change its monetary policy strategy. To make matters worse, rapid market declines can trigger forced trades by aggressive speculators who have borrowed money to buy stocks and are now subject to margin calls further liquidating their stock holdings, leading to a sales cascade.
But here’s the thing: a stock market crash creates opportunity, especially for savvy investors. You may be able to splurge on the stocks and funds you have in mind at steep discounts or you can simply continue to buy stocks on your usual investment schedule.
The best place to start for novice investors is with index funds, says Paul Miller, a New York-based certified public accountant (CPA). “Buy them regularly, consistently. Then go to bed at night,” he says.
3. Average dollar cost, even going down
When the market is boiling, the surest way to go on a buying spree is to average your purchases. This means making purchases of a fixed dollar value at regular intervals, even when the market looks scary.
Averaging smoothes out the highs and lows of your average purchase price, often lowering it in the long run. Spreading your purchases in this way reduces your risk since you won’t be investing all of your money when the market is at a particular price level. Hope this helps you get rid of that fear of “what if the stock crashes tomorrow?” »
If you’re investing through a workplace pension plan, periodic dollar purchases occur automatically. If you’re investing on your own, whether in a taxable investment account or a tax-advantaged Individual Retirement Account (IRA), your brokerage should have a feature that allows you to automate your contributions.
4. Dividend hunt during a stock market crash
For the more adventurous, bear markets can be a good time to consider letting dividends guide your investment choices. Many companies share their profits with their shareholders through a small annual dividend, much like banks pay interest to savings account holders.
Although dividends aren’t guaranteed and can change, companies that issue dividends tend to be more mature and their stock prices are less volatile – and, as long as the dividend is paid, there are always gains. . This means that investing in dividends can be a smart move during a market downturn, when stock prices and yields might otherwise fall.
5. Mount sector rotation
A traditional strategy for dealing with market downturns is to move money from one stock sector to another. In times of strong growth, for example, tech stocks seem to do well. Meanwhile, when the economy slows, “boring” sectors like utility stocks tend to hold up better. So if you switch strategically from one to the other, you might avoid big declines in a particular sector.
But not everyone is a fan of the so-called sector rotation.
“I’m not very keen on sector rotation. It’s another form of market timing,” says Kansas-based Certified Financial Planner (CFP) Desmond Henry. “You have to know when to go in and when to go out. I remember when all of those hotshot stocks became a big deal, but by the time the trade caught on, it was too late. And even if you have time [the purchase] Do you come in when you go out?
You can avoid this challenge and maintain strong returns by buying diversified index funds, which can perform well regardless of the direction a particular sector is heading. If you own the whole market to begin with, you are already on your way to benefiting from the growth of one of its sectors, which can help support other struggling sectors in the short term. Check out our list of the best stock index funds for more ideas.
6. Buy bonds during a stock market crash
Bear markets are also an opportunity for investors to consider an area that novice investors might miss: bond investing.
Government bonds are generally considered the safest investment, although they are decidedly unsexy and generally offer meager returns compared to stocks and even other bonds. Yet in times of uncertainty, holding certain government bonds can make it easier to sleep at night, given their flawless redemption history.
Generally, government bonds must be purchased through a broker, which can become expensive and complicated for many individual investors. However, many retirement and investment accounts offer bond funds that contain many denominations of government bonds.
However, don’t just assume that all bond funds are funded by safe government bonds. Some also contain corporate bonds, which are riskier.
7. Reduce your losses in an accident (and save on taxes)
Despite our advice above, sometimes cutting your losses is the smartest investment decision you can make.
Not only does this free up money that you can then invest in other ways, but, provided you invest in a taxable account, it also allows you to claim your losses on your taxes. This investment strategy, called tax loss harvesting, allows you to offset income against the losses you realize, which can reduce your tax bill.
It’s best to speak to a tax professional before committing to this strategy to ensure you avoid what’s known as a wash sale, which occurs if you buy an investment that’s too similar to one you sold at a loss. You can also consider having a robo-advisor manage your investments for you.
Note that the best robo-advisors already have built-in tax loss harvesting features.
8. If you’re retiring soon, be more careful
One group of investors who have something to fear from a stock market crash are those facing impending retirement. It’s a huge disappointment to start tapping into retirement savings during a bear market.
But if you’ve planned your retirement carefully, you’ll probably be able to avoid the harshest effects and anxieties of an economic downturn. Remember: Even if you start out aggressively when saving for retirement, you’ll ideally lean towards increasingly conservative, bond-based holdings to preserve your savings as you age.
You can even use a bucket strategy that retains at least a few years of cash living expenses to fully protect your lifestyle from extreme market declines.
Having the cushion to keep some of your nest egg invested helps you benefit from future market recovery and growth. This can be invaluable for long-term investors of all ages, including those who are already retired.
Yeah. It’s true. You can still be a long-term investor in your heyday. If you’re in your mid-60s, you might have another two or three decades to take advantage of investment growth. While this is helpful for all retirees, it’s especially important for people in less secure financial situations to keep in mind so they can minimize future shortfalls.
If you’re years or decades away from retirement, start planning now how you’ll adjust your asset allocation as you age so you’re ready for whatever the market brings. And if you’re closer to retirement than retirement, but had no money to spare before a stock market crash, don’t panic. Make an appointment with a financial advisor to review all your options.