Stock Market Crash, Now What?
With the stock market crash of 2020, investor sentiment turned sour in the face of the economic impact of the global pandemic. This coupled with a growing fear of a global slow down and recessions led to double digit percentage drops in the FTSE 100, S&P 500 and Nasdaq. The Dow Jones which measures 30 of the largest companies in the US stock markets recorded historic loses, with the single largest points drop since the market crash of 1987. Airline and cruise liner stocks have been particularly badly hit with investors ducking for cover. Since then, stock markets have rebounded in large part thanks to the bull run in tech stocks and of course government stimulus and the intervention of central banks such as the federal reserve. History tells us that markets do recover from these kinds of crises in the long run and so far, we are seeing a swift recovery in the overall stock markets. So, what now? In this article I will outline 5 simple strategies that show you what you can do and what to avoid during and after a stock market crash.
1. Stay invested in stocks
Assuming you’re already invested in stocks either through a stocks and shares ISA or an investing account it is important to remember why you decided to invest in the first place. Selling your stocks during a stock market decline or bear market would turn paper losses into confirmed real losses. Of course take time to reassess stocks that you bought before a market crash and assess if their decline is anything deeper than a short-term hit. Chances are that the good company you invested in for the long-term pre-crash is still likely to be a good company after.
- “My portfolio has taken a 30% or more hit, I should sell now before it’s too late?” You can’t do anything to prevent this kind of hit to your portfolio during a market decline, but you can prevent these losses becoming permanent by remaining invested during a decline. Historically it’s never been a good idea to sell during a decline as you would miss the upside when coming out of a dip.
- “I’ve made considerable gains since I started investing, if I sell now, I could buy back my investments at a discount?” Predicting the market is an extremely high-risk strategy and the kind of gamble to be avoided if we listen to one of the most successful investors of all time. Warren Buffet’s investing philosophy has been to look for stocks in businesses that he likes to own for the long-term, preferably forever, accepting that there will be ups and downs. So long as you’re invested in good quality stocks, staying invested over the long-term is a proven and highly successful strategy to grow your investments through the power of compounding. The key take away here is that it’s extremely difficult and risky to try to time the market!
2. Look for buying opportunities
Looking for buying opportunities is not quite the same as trying to time the market so please don’t confuse the two. Value investors like Warren Buffett tend to look for good businesses but at the right price. Meaning he only buys stocks when he thinks they are either undervalued or trading at a fair value. In a stock market decline or crash there are often great buying opportunities which allow investors to pick-up blue-chip stocks below their intrinsic value.
During stock market declines, stocks can decline in value through no fault of their own. In this case they are part of a market trend downwards and as such could offer the canny investor an opportunity to pick up some bargains. Blue-chip stocks such as Amazon (AMZN), Facebook (FB), Visa (V) and Disney (DIS) are no less great companies just because they have declined in price when the overall stock market crashes. These specifically mentioned stocks are not buying recommendations, however, serve as an example of how hugely successful businesses can present rare buying opportunities in a stock market crash.
3. Diversify
What does it mean to diversify? Essentially it means having a variety of asset classes such as stocks, bonds, cash and commodities. Within each of these asset classes such as stocks, you can diversify even further. Holding a mixture large cap stocks and small cap stocks as well as stocks from different sectors such as tech stocks, health care and consumer staples. All of which help you the investor hold a well-diversified portfolio.
Weathering the storm when the stock market crashes can be made easier when you are well diversified. For example, you might be tempted to throw everything at big tech stocks during a bull run and ignore consumers staples that historically fair well or have reduced losses during a stock market downturn or recession. Holding a variety of sectors will serve to better manage risk in your portfolio during the good times and the bad.
Don’t forget about gold! During the great recession of 2008 gold initially went down with stocks before going on to post new highs while stocks were still reeling in a bear market. Gold is often used by investors as a safe haven asset in times of economic uncertainty. A common recommendation for investors is that gold should make up between 5 – 10% of your portfolio investments.
4. Invest with a long-term horizon
New investors often see investing in stocks as a means to get rich quick. It may be tempting to look at the recent gains from tech stocks and e-cars such as Tesla and believe it’s easy to get rich in the short term. This kind of investing is highly speculative and more like betting than investing. By all means invest in companies such as Tesla (TSLA) if it is a company you believe in but ensure that you do so having done your research using a long-term approach. Investing in the long-term will likely see better returns and help ride the waves of volatility, particularly when invested in the broader market such as an index fund that tracks the S&P 500. By long-term investing it is generally meant a minimum of 10 years. If this seems like a long time, then you should reconsider if investing really is for you or alternatively revaluate your expectations of investing in the stock market.
Investing in the stock market will test your appetite for risk, patience and metal during a stock market crash. The long-term investors should be prepared to experience the highs and lows while continuing to invest in stocks that he or she feels have the best prospects of growth and dividend returns over a 5 -10 year period but preferably a lot longer.
5. Start investing
If stock investing during a crash sounds crazy to you then you’re not alone. Investing when stocks seem to be finding new lows goes against every natural human instinct when it comes to parting with your hard earned cash. Yet this has over the last 40 years been historically the best time to invest. The simple reason being that by investing during a crash you’re picking up stocks at a discount. Think of it as a Black Friday sale but for stocks. Warren Buffett has famously coined the phrase “be fearful when others are greedy and greedy when others are fearful” which is a particularly poignant piece of investing wisdom during a stock market crash.
If investing in individual stocks does not appeal to you, then investing in a low cost ETF that tracks a market such as the S&P 500 may be a better option for the beginner or those seeking a more hands off investment approach. By investing in the broader market through an ETF index fund during a stock market crash you will still be able to benefit from long term gains as the market recovers and goes on to make new highs.
As someone who was invested before the crash I used this opportunity to continue to invest regularly each month into my own portfolio of individual stocks, etfs and mutual funds. I believe that in the long-term this is the best strategy for investing in the stock market. I firmly believe in the old adage that it’s time in the market not timing the market that is one of the smartest and safest ways to boost my finances.
