Stock trading is fraught with risks, and it exposes traders to situations where they can end up losing significant money. However, investors and traders can regain their losses and end up better than before once crashes subside. Surviving your first stock market crash can be stressful but it gets easier over time. This guide will explore how you can stay firm during a stock market crash.
Uncertain Backdrop
The current macroeconomic and geopolitical environment has made it riskier to invest. Even with these risks, the stock market continues to move on the upside.
The broader S&P 500 Index, which plunged sharply earlier this year amid the onset of the pandemic, has rebounded nicely after hitting a bottom in late March. The stock market also recovered significantly after a sharp downturn in 2022.
Higher interest rates and inflation have created more pressure on the economy. Long-term investors can normally ignore the noise and invest in solid companies. The only certainty in the stock market is the presence of many uncertainties.
Identifying a Crash
A bear market is a pullback in excess of 20% from a recent high. A stock market crash can broadly be defined as a sudden and steep decline in stock prices within a very short interval of time. When stocks begin to fall, the already weak investor sentiment worsens further. Fear becomes the dominant emotion, taking over from greed, and this leads to incessant selling, wiping away millions in market value from stocks.
History of Stock Market Crashes
Among the biggest recorded stock market crashes in the history of the U.S. are:
- The stock market crash of 1929
- The stock market crash of 1987
- The dot-com bubble burst of 1999-2000
- The 2008 crash in the wake of the Great Recession that followed the Lehman Brothers bankruptcy.
For those jittery investors panicking over potential losses, here are a few guidance points that can help you stay sane amid the pandemonium.
Allow the Turn of Events to Run Its Course
Having a clear mind is very important in investing. Knee-jerk reactions, which burn a hole in the pocket, should be avoided at any cost. Fear and panic should be kept in check.
It is better to keep in mind the maxim "buy low and sell high."
Panicking and pressing the sell button at a time when the stock market crashes will only leave an investor poorer, shutting them out of the opportunity of capitalizing on a market rebound.
If we go back in history, stock markets around the globe have survived some serious crashes and have emerged stronger.
The most recent crash amid the Great Recession saw the S&P 500 hitting a low of 666.79 on March 6, 2009. Cut a little over a decade from there, the index has added more than 400%.
It's just a matter of waiting out the adversity with ample patience.
Stay Immune to the Noise Around
With the mushrooming of the so-called stock market pundits, who have an opinion at every turn of the stock market, it is quite natural to be swayed by their recommendations and warnings.
At least, in times of crises such as a market crash, it is advisable to shut out of the cacophony. Heeding the advice of every expert only lends to more confusion, making it harder to think rationally.
Instead, stay focused on investment goals and look at a longer time horizon to ride out the volatility.
Turn Adversity Into Opportunity
As the saying goes, an optimist finds opportunity even amid adversity. Be that optimist who still sees the rosier side of dark times. Here are some things an investor can do to capitalize on a market downturn:
Scout for stocks of profitable companies that pay out dividends. Dividends make for a steady stream of income that accrues to an investor. It is paid out of the net income earned by the company. Apart from coming in handy for meeting expenses, dividends can also be used for reinvesting.
One can invest in a fund or ETF investing purely in dividend-paying stocks such as the Vanguard Dividend Appreciation Index Fund ETF Shares VIG 0.13% and SPDR S&P Dividend ETF SDY 0.27%.
Consider bonds. Bonds also fetch fixed income in the form of interest.
Buy recession-proof or defensive stocks such as consumer staples that can withstand the stock market sell-off.
Diversify your risk by investing in a portfolio or an ETF.
Avoiding herd mentality, maintaining one's sanity in the face of adversity, cutting out the noise and devising a prude investment plan for the downtime will serve an investor well during times of a stock market crash.
Staying Strong During a Stock Market Crash
A stock market crash can test the most patient investors. It's easy to follow a buy-and-hold strategy when the stock market is performing well. Stock investors have a tremendous opportunity during market crashes to accumulate shares at significant discounts. Monitoring your positions and keeping the long-term perspective in mind can help you stay vigilant during significant price declines.
Frequently Asked Questions
How do investors make money during stock market crashes?
While some investors get lucky with good timing, most investors profit by purchasing reliable companies. Then, they wait for their stocks to recover.
Do you lose all of your money if the stock market crashes?
Losses are temporary unless you sell. It’s possible for your initial investment to recover after a stock market crash. Most investors do not lose all of their money during a crash.
How can I protect myself from a stock market crash?
Buying blue-chip stocks can minimize the impact of a stock market crash. Keeping enough money to cover necessary expenses can help you hold onto your positions instead of selling them during a crash.