Every investor is concerned about the likelihood of a big economic calamity, no matter how remote. This has occurred before, it is happening now and will happen again in the future. A crash is marked by a sharp and sudden drop in stock prices, usually following an uptrend in the stock market, also known as a bull market. When a crash happens, years of hard-earned earnings and retirement assets seem to get wiped out in a short period of time.
Fortunately, you may take steps to preserve majority of your assets from a market crash or for handling stock market crash during a global economic downturn. A successful defense plan must include both preparation and variety. They can help you weather a financial storm if you work together.
1. Broaden your horizons - Diversify
Diversifying your portfolio is perhaps the most important thing you can do to safeguard your money from a severe bear market. When a market decline hits, your results may vary and possibly for the better if you’ve invested money across different baskets of asset classes like stocks and bonds. Distributing your money across investments, is key to reducing investment risk and smoothing the ride through a tumultuous market. Diversifying helps ensure your investments aren’t concentrated in one type of asset or stock. So if one stock or industry is under pressure, your other investments may help offset those losses.
Depending on your age and risk tolerance, it may be prudent to invest the majority of your retirement assets in individual stocks, stock mutual funds, or exchange-traded funds (ETFs).
However, if a crisis is imminent, you must be prepared to relocate at least a portion of that money into something safer. Individuals may now invest their money in a variety of products, each with its own level of risk: stocks, bonds, cash, real estate, derivatives, cash value life insurance, annuities, and precious metals, to name a few. You can also play around with various assets, such as a small share in oil and gas production. Make sure that you have something to fall back on.
2. Buy the Dip
Market dips can also be a buying opportunity. Think of it as buying stocks on sale when the market crashes. The trick is to be ready for the fall and willing to commit some cash to snap up investments whose prices are dropping. First, ensure that you already have an emergency fund, you’ve allocated money for retirement and you have cash available for everyday expenses. Now, you must set aside some cash so you’re ready for a flash sale when disaster strikes, and you keep a running wishlist of individual stocks you would like to own.
If you do buy the dip, you probably won’t catch the stock at its low, but that’s fine. The point is to be opportunistic on investments you think have good long-term potential.
One strategy to overcome the fear of bad timing is to dollar-cost average your way into the investment. It smooths out your purchase price over time and puts your money to work when other investors are exiting the market or sitting on the sidelines in fear.
3. Focus on the long term
Tons of research prove that though stock market returns can be quite volatile in the short term, stocks outperform almost every other asset class over the long term. Over a sufficiently lengthy period, even the biggest drops look like mere blips in the market's long-term upward trend. This point needs to be kept in mind especially during volatile periods when the market is in a substantial decline. Having a long-term focus will also enable you to perceive a big market drop as an opportunity to build wealth by adding to your holdings, rather than as a threat that will wipe out your hard-earned savings. During major bear markets, investors sell stocks indiscriminately regardless of their quality, presenting an opportunity to pick up select blue chips at attractive prices and valuations.
You probably don't want to invest all of your money in safe assets. They just do not pay off sufficiently. However, it is smart to keep at least a small portion of your portfolio in something that will not go down with the markets in case of handling stock market crash.
Bank CDs and Treasury securities are attractive bets for short-term investors.
If you want to invest for a longer length of time, fixed or indexed annuities, or even indexed universal life insurance policies, can outperform Treasury bonds. Corporate bonds and even blue-chip preferred stocks may provide competitive income with little to no risk.
4. Seek a second opinion
Being an investor is rewarding when the stock market’s on a tear and your portfolio is going up in value. But when times get tough, self-doubt and ill-advised tactics can take control. Even the most confident investor can fall victim to harmful short-term thinking. Don't let self-doubt destroy your investing plans.
Consider seeking the service of an investment advisor to kick the tires on your portfolio and provide an independent perspective on your investment plan.
So, these are four important strategies that you can follow for handling stock market crashes.
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