What Should your Investment Strategy be During a Market Crash?

When stock markets turn volatile, even seasoned investors can feel uneasy. However, with some intelligent planning and discipline, market crashes don't have to sink your portfolio. This article outlines time-tested strategies to help you invest wisely during turmoil.

Discover how to take advantage of downswings, resist the urge to panic sell, and set your portfolio up for future growth. With insight into the anatomy of crashes, historical trends, and level-headed guidance, you'll be equipped to make rational moves until the storm passes.

What is a Stock Market Crash?

Stock markets periodically experience sudden steep declines, usually following a bull market uptrend. A stock market "crash" refers to a sharp single day drop of 7% or more in a primary index like the S&P 500 or Nifty. While rare historically, crashes inevitably occur every few years, such as in 1929, 1987, 2000 and 2008. Understanding what constitutes a crash helps investors decide proper reactions. Automatic responses often do more harm than good.

What to Do During a Crash?

When the stock market drops, planning your investments is important. A plan that fits your comfort with risk and how long you want to invest can help you avoid making quick decisions you might regret later.

Here are some good things to keep in mind when the stock market is uncertain:

Know What You Own

Review your original investment research. Understanding your initial reasons for purchasing can prevent hysteria-driven selloffs of quality assets. Take time to evaluate whether anything fundamental has changed with each holding.

Trust in Diversification

Diversifying your investments means spreading them across several types of assets, like stocks and bonds. If you have funds that automatically adjust over time, called target-date funds, you're already diversified enough to handle changes in the market. It's best to avoid putting all your money into one specific industry or company. Investing in hybrid funds can be a good option if you want to invest in mutual funds. Hybrid mutual schemes invest mostly in equity and debt perform better in a volatile environment.

Consider Buying

Falling stock prices are promising investment opportunities, especially if you have some cash available. Instead of trying to predict the lowest price, consider gradually investing in the things you want to keep for a long time. Similarly investing lumpsum in Mutual Funds also can be a good investment option.

Get a Second Opinion

Even seasoned investors can benefit from an outside perspective during stressful periods. A fee-only financial advisor can assess your plan and provide guidance grounded in historical data, not emotions.

Take the Long View

Markets rebound from crashes in months or years. Selling during panics locks in losses. Focus on long-term growth and avoid short-term predictions, which are reliably incorrect.

Pursue Tax Advantages

During market downturns, there are opportunities to make strategic tax moves, such as converting traditional retirement savings into Roth accounts. Speaking with a tax expert to see if this strategy could benefit you is important.

Historic Market Crashes

Despite volatility being part of equity investing, outright crashes are relatively rare. Some seminal examples include:

1929 Crash and Great Depression

The 1929 plunge marked the dawn of the 1930s Great Depression. The plunging economy and panic selling caused a stomach-churning 80%+ loss in the Dow over 3 years.

Black Monday – 1987

1987, the Dow astonishingly shed 23% in a single October trading session. Computer-automated trading pressured indexes down at unfathomable speed.

Dotcom Bubble Burst – 2000

In the early 2000s, speculative investing in internet startups led indexes on a bubble-like surge. The inevitability of popping up of this "dotcom bubble" shredded market valuations until 2007.

Financial Crisis – 2008

Triggered by the systemic crash of the mid-2000s US housing bubble, the 2008 fiscal crisis sank the S&P 500 by over 55% intra-year.

COVID-19 Pandemic – 2020

As the coronavirus rapidly circulated globally in early 2020, governments mandated massive shutdowns, spawning fears of economic freefall. The S&P 500 plunged over 30% in weeks.

While such events feel cataclysmic in real-time, markets have always eventually regained lost ground. Patience and prudent strategy win out.

Conclusion

Even experienced investors can find stock market crashes challenging to deal with. However, if you understand how they work, spread out your investments, stay calm, and think long-term, you can get through tough times. In the past, every crash has eventually led to the market going up again. Keep things in perspective, don't make hasty decisions based on fear, and you'll be ready for whatever happens.

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