It is well-known that investments are subjected to market risk. Though there are low-risk and high-risk profile investments, every investment possesses some risk. The low-risk profile investments like bank deposits come with an inflation risk while other popular investments like stocks, mutual funds, real estate, etc. come with market risk, that is, if the market conditions sour the investment might experience loss.
Stocks are considered popular investment options globally. It is also considered one of the high-risk investment options. Though the risk is high, the returns on the stocks are also high and it is one of the investment options that can keep up the pace with the inflation in most cases. Any investor invests in the stock market for good returns and it is one of the most recommended long-term investment options. The stock market is volatile and this raises the important question, what to do when the stock market crashes?
How to determine a stock market crash?
The ups and downs are common in the stock market. These ups and downs are not considered a crash. But the crash is abrupt which unimaginably puts down the stock price. A stock market crash is usually a side effect of the market conditions like an economic crisis or catastrophic events. But in the global history of the stock market, crashes happened only a few times. The recent crash was in 2020 due to the Covid-19 pandemic. With the widespread of Covid-19, globally the stock market started falling down and took 6 months to pick up again.
Though there is no significant number to determine the stock market crash, the investors can know it when looking at the trend of the stocks. Not just market events, the stockholder’s reaction can also lead to a decline in the stock prices which can lead to a crash. When there is a slight decline in the stock price and the stockholders want to sell the stocks in fear it will eventually lead to a decline further and collapse entirely.
What to do when the stock market crashes?
Although the stock market crash can be a panic situation for the investors, it is advised not to take any haste decision. Here are a few things you can do when you face a stock market crash.
- Do nothing
Yes. Usually, when there is a fall or a fall in expected in any market, the investors tend to get rid of it by selling the investment which is a general fear-based decision. It is well-known that the stock market is for long-term investments and the long-term investor need not worry about the crash now and wait for the market to pick up. The crash in the stock market is due to global factors or actions and this will parallelly have an impact on the economic conditions as well. It is ideal for an environment to settle in the situation and raise after a while. It is important to understand that the crash is temporary and would last only for a few months. It is well-proven in the past stock market crashes as well that the crash is only for a while and it automatically picks up.
- Buy more stocks
Instead of selling the existing stocks, it can be profitable if you buy more stocks at the time of a crash. Because it is an ideal time to buy more stocks at less prices. But the process of buying stocks during a crash should not be a panic buy where you don’t think of the investment goal and just buy.
When there is a stock market crash, the prices of the stocks reduce at this moment understand your investment goal, check the risk tolerance and only when you have enough income that will fulfil the basic needs, emergency funds and savings to live financially stress-free for a while, then you can buy more stocks with the extra money. In simple terms, only when you can take that risk without worrying much then you can proceed further to take advantage of the downfall and wait until it reaps the profits.
If you think you can’t take a risk by investing again, then stand still till the market settles and the stock prices rise again.
- Focus on the diversification
During this time, a diversified portfolio can come to your rescue. This is for short-term investors who were looking to liquidate their investment but the stock market crash occurred. Now you can focus on the diversified assets in the investment portfolio. There would be other investment options that are standing strong without being affected by the stock market crash. You can wait for a while till the market picks up again and focus on other portfolios if there is a quick need for money.
Usually, the stock market crash can be profitable for an investor if made the right use of it without making any decisions in haste. Though the road of investments can be bumpy for a while, the aim of an investment is to grow your wealth. But this is possible only when you pick the right investment options as per your investment goal and always invest only after having a solid emergency fund and savings.
About the author
Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.
