Stock Market Crash: What Should You Do? – Forbes Advisor

There is an old saying on wall street: if you don’t sell it, you haven’t lost it. In other words, the value of your investments doesn’t really matter until the day you need to withdraw money, so don’t worry about the ups and downs in the meantime.

That’s no consolation when your portfolio has lost 20% or even 30% of its value in a stock market crash. just look at the market this month and you’ll know what I mean, or think back to early 2020 when the covid-19 pandemic started.

Reading: What to buy if stock market crashes

Market crashes are inevitable and they really hurt. So what should you do when there is an accident? make the most of it, here’s how.

1. do nothing during a market crash

If you believe in your current investment strategy and portfolio assets, don’t change your plans unless you have a good reason. after all, when you created your portfolio, you may have had a market crash like this in mind.

People who shy away from selling during a crisis often regret their choice. Take those who jumped ship in the spring of 2020, when the S&P 500 fell more than 30% in a very short period. they were already regretting their moves in the summer of 2020, when early covid market losses were erased by the lightning-fast rebound of the pandemic. and by the end of the year? 65% of gains had been lost since the bottom of the crash.

2. shopping during a market crash

Market declines are often the result of events such as the onset of covid-19 or the news that the Federal Reserve will change its monetary policy strategy. To make matters worse, rapid market declines can trigger forced trades by aggressive speculators who have borrowed money to buy stocks and are now subject to margin calls that further liquidate their stock holdings, leading to a cascade of sales.

But here’s the thing: A market downturn creates opportunities, especially for savvy investors. you may be able to splurge on stocks and funds you’ve been interested in at deep discounts, or you can just continue buying stocks in your regular investment program.

The best place for novice investors to start is with index funds, says Paul Miller, a New York-based certified public accountant (CPA). “Buy them in a regular pattern, consistently. then go to sleep at night, ”he says.

3. average dollar cost, even downwards

When the market is down, the safest way to shop is to average the dollar cost of your purchases. That means making purchases of a fixed dollar value at regular intervals, even when the market looks scary.

Dollar cost averaging smooths out the ups and downs of your average purchase price and often lowers it in the long run. Spreading your purchases this way reduces your risk since you won’t be investing all of your money when the market is at a particular price point. Hopefully, that will help free you from that fear of “what if the stock crashes tomorrow?”.

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If you’re investing through a workplace retirement plan, dollar cost averaging is done automatically. If you’re investing on your own, either in a tax-advantaged investment account or a tax-advantaged individual retirement account (IRA), your brokerage should have a feature for you to automate your contributions.

4. seek dividends during a stock market crash

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

Although dividends are not guaranteed and 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, there is always some profit. this means investing in dividends can be a smart move during market downturns when stock prices and yields may drop.

5. mount sector rotation

A traditional strategy for dealing with market downturns is to move money from one stock sector to another. during times of high growth, for example, technology stocks seem to do well. meanwhile, when the economy slows, “boring” sectors like utility stocks tend to hold up better. therefore, by strategically moving from one to another, you can avoid big drops in a particular sector.

but not everyone is a fan of so-called sector rotation.

“I don’t really like sector rotation. It’s another way to time the market,” says Kansas-based Certified Financial Planner (CFP) Desmond Henry. “You have to know when to get in and when to get out. I remember when all those stay-at-home stocks became a big deal, but by the time trading caught on, it was too late. and even if you schedule [the purchase] right on the way in, when does it come out?”

You can avoid this challenge and maintain strong returns by buying diversified index funds, which can perform well no matter where a particular sector goes. If you own the entire market to begin with, you’re already set to benefit from growth in any of its sectors, which can help prop up other sectors that are floundering in the short term. Check out our list of the best total stock index funds for more ideas.

6. buy bonds during a market downturn

Bearing markets are also an opportunity for investors to consider an area that novice investors might miss: bond investing.

Government bonds are generally considered the safest investment, although they are decidedly unattractive and typically offer poor returns compared to stocks and even other bonds. Still, in times of uncertainty, holding onto some government bonds can make it easier to sleep at night, given your impeccable payment history.

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

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However, don’t assume that all bond funds are filled with safe government bonds. some also contain corporate bonds, which are riskier.

7. reduce your losses during a crash (and save on taxes)

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

Not only does it free up money that you can then invest elsewhere, but as long as you’re investing in a taxable account, it also allows you to claim your losses back on your taxes. This investment strategy, called tax loss harvesting, allows you to offset income against losses you earn, which can lower your tax bill.

It’s best to talk to a tax professional before engaging in this strategy to make sure you avoid what’s called a bogus 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 an automated advisor manage your investments for you.

Note that the best robotic advisors already have tax loss collection features built in.

8. if you retire soon, be more careful

One group of investors who have something to fear from a stock market crash are those facing impending retirement. It’s a hassle to start tapping into retirement savings during a bear market.

But if you’ve planned your retirement carefully, you can probably avoid the harsher effects and anxieties of a recession. Remember: While you start out aggressively when saving for retirement, ideally you’ll want to switch to increasingly conservative bond-based shares to preserve your savings as you age.

You can even employ a bucket strategy that keeps at least a few years of living expenses in cash to fully protect your lifestyle from extreme market downturns.

Having the cushion to keep some of your savings invested helps you benefit from future market recovery and growth. this can be invaluable to long-term investors of all ages, including those who are already retired.

yes. that’s how it is. you can still be a long-term investor in your golden days. if you’re over 60, you could have another two or three decades to benefit from investment growth. while that’s helpful for all retirees, it’s especially important for people with less solid financial foundations to keep this in mind so they can minimize future shortfalls.

If you’re years or decades away from retirement, start planning now for how you’ll adjust your asset allocation as you age so you’re prepared no matter what the market brings. And if you’re closer to retirement than her but didn’t have any money saved before the market crash, don’t panic. Schedule a meeting with a financial advisor so you can discuss all of your options.

Source: https://amajon.asia
Category: Stocks