How Investors can handle a Stock Market Crash?

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No matter how hard you prepare, there is also some impact on your investments when the stock market crashes. In 2020, during the 1st wave of the COVID-19 pandemic, stock markets crashed dramatically and caught most investors unawares.   While a crash in stock markets or a market correction is impossible to predict, there are various strategies that investors can utilize to minimize its impact on their investment portfolio. 

A lot of experts list things to be prepared for when the stock market crashes but what after it does? There are not many experts who have listed foolproof solutions. Not everyone is patient or financially stable until the stock prices go back up again and, in such situations, the pressure is quite high. To start off, we suggest you take a deep breath and relax your body and the second step would be to check out the checklist below that will help you with what to do when the stock market crashes.

1. Resist the Urge to Make Panic Buys

Similar to making panic sales during a market crash, it is also important that you do not make panic buys during a market crash. Panic buying can be described as a state of mind that pushes you to make investments indiscriminately, which can become an obstacle to reaching your current investment goals. 

After all, when markets are down, it often seems the best time to invest at reasonable valuations. In such cases, investors often invest in Bluechip stocks or purchase Index Funds. 

However, many investors forget one key aspect of Equity investing in such cases – their risk appetite. The buying frenzy when markets tank can lead investors to invest in Equities well beyond their actual risk appetite.  

So instead of panic buying, you should plan for these investments before markets actually tank. But to do this, you need to know how high or low your risk tolerance is. Only then will you be able to accurately decide how much of your existing portfolio can be moved from low-risk assets such as Debt Mutual Funds and Fixed Deposits to higher-risk assets such as Equity Mutual Funds. 

2. Invest only as much as you can after saving enough for the next 5 years

A stock market crash is no good news for the short-term marketers and it is always disturbing. The common reason for this is the money involved in the market is actually the money taken as a loan or by submission of entire assets. We do not recommend any marketer to invest money in the stock market without saving enough for the next 5 years.

A stock marketer needs to be intelligent and know the stock market’s volatility. Blindly investing in the stock market is no good and will ultimately lead to heavy losses. If you are investing in stocks today, ensure you have enough fuel left if the money is taken away. A trick that I personally use is to invest certain money in the stock market which is meaningless to me. So, even if the money is drowned tomorrow, I am still running with the regular stream of income.

3. Keep your Portfolio Rebalanced

Portfolio rebalancing is a strategy that helps in reducing the overall risk in your investment portfolio to provide better risk-adjusted returns on your investments. This strategy involves buying and selling investments periodically so that the weight of each asset class is maintained as per your targeted allocation. 

So, the first step in rebalancing your portfolio is to have an asset allocation strategy in place. If you don’t have an asset allocation plan in place already, a stock market crash offers you the perfect opportunity to take stock of your current investments.

4. Resist any urge to Sell Stocks

Selling stocks in panic is the worst thing you could do after a stock market crash. Successful investing is about buying low and selling high. When you sell after a crash, you do just the opposite.

And if you think you can just cash out for now and then get back in when the market improves, consider this: You have no way of knowing when the market will swing back. And there is a big cost to missing just a few really good days in the stock market.

5. Hunt for Dividends during a Stock Market Crash

For the slightly more adventurous, down markets can be a good time to consider letting dividends drive your investment choices. Many companies share their profits with shareholders through a small dividend yield annually, a bit like banks pay interest to savings account holders.

While dividends aren’t guaranteed, and they can change, companies that issue dividends tend to be more mature and their share prices are less volatile—and, as long as the dividend is paid out, there’s always some gains. This means dividend investing can be a smart move during market downturns when share prices and returns may otherwise be falling.

6. Buy Bonds during a Market Crash

Down markets is also a chance for investors to consider an area that novice investors might miss: Bond investing.

Government bonds are generally considered the safest investment, though they are decidedly unsexy and usually offer meager returns compared to stocks and even other bonds. Still, during times of uncertainty, holding some government bonds can make it easier to sleep at night, given their history of flawless repayment.

Generally, government bonds must be purchased from a broker, which can get pricey and complicated for many individual investors. Many retirement and investment accounts, however, offer bond funds that contain many denominations of government bonds.

Don’t just assume all bond funds are stocked with safe government bonds, though. Some also contain corporate bonds, which are riskier.

7. Get more Long-Term Investments

This is a perfect opportunity to invest in long-term stocks is right when the market is hit the rock bottom. The reason for this is simple, long-term stocks that last for over 10-25 years yield more profit because of the indirect impact of deflation and high-profit margins. You must be wondering how deflation can be one of the reasons for higher profits, the reason is what you invest today will hold lesser value in the coming 10,12,15 years because of the deflation, and that time, the investment may be considered minimal but the profits will be much more in numbers.

8. Cut Your Losses during a Crash and Save on Taxes

Despite our advice above, sometimes cutting your losses is the smartest investing move you can make.

Not only does it free up money that you can then invest differently, but, provided you’re investing in a taxable account, it also allows you to claim your losses on your taxes. This investing strategy, called tax-loss harvesting, lets you offset income with losses you realize, which may lower your tax bill.

It’s best to speak with a tax professional before you engage in this strategy to make sure you avoid what’s called a wash sale, which happens if you buy an investment that’s too similar to the one you sold at a loss. You may also consider having a robo-advisor manage your investments for you. Note that the best robo-advisors already have tax-loss harvesting features built into them.