The markets are turning red. You’ve enjoyed countless months of safe passage into the lands of green gains, but now your portfolio is starting to slide. What do you do? Sell everything and hope that the markets will recover within the next few years? Not at all! Here’s what you need to do when the markets inevitably crash.
The number one recommendation I pass to fellow investors is to part with your money wisely. Never just invest because you spot a good deal. You need to do your due diligence even during times of considerable growth. So long as you’ve invested in strong companies that are likely to come out the other side, you’ll be absolutely fine.
If you see a 10% drop in stock portfolio performance and decide to sell, you may be able to time the market as it starts to flatten out in time for a recovery, but you may miss this opportunity and buy back in at a higher price, meaning you’ve not only lost some money, but then bought back your shares at higher prices.
The best method is to dollar cost average as the market takes a tumble, so long as you’re investing in safer companies that you believe will have a good chance of weathering the storm.
Understand why markets fall
Markets don’t always go up. Movements back down south are often referred to as dips or corrections. Stock pricing is mostly attributed to supply and demand but also takes into account plenty of other factors like public sentiment, news cycles, and more. Corrections are often dropping in value of more than 10% from the peak price.
Should values tumble past the 20% marker, you can assume we’re in a bear market, which means the immediate outlook isn’t good and further dips are to be expected. Stock prices fall as more people sell shares than there are those buying them. If there’s more supply than demand, the price will drop. It’s the opposite of growth, which is more demand than supply.
Dollar cost average
Dollar cost averaging (DCA) is the method of investing I, like other prominent figures within the industry, recommend carrying out. To dollar (or “pound” if you’re British like I) cost average, simply invest the same amount into stocks at regular intervals, regardless of share prices. This is a good way to determine how much you should invest each month.
If you invest £100 into Apple at £100 and then another £100 when it’s at £150, your average price per share is now £125. Should the stock drop to £50, instead of selling, you could buy an additional £100 worth, which brings your average back down to £100. On a regular basis, your average cost should follow the market price.
By attempting to time the market and only purchase more shares when the price is lower, you risk missing out on golden opportunities to buy the stock at the same price. Apple could go up to £150 and then £200, resulting in no discount for you to top up your portfolio. DCA ensures the bolstering of your holds with good prices.
During a market crash, DCA can help alleviate some of your unrealized losses. When Apple fell to £50, instead of selling, I would just buy more. In fact, if you believed so strongly in the case of Apple as a company, you could buy £200 or £300 worth of shares to really drop your average price. Then when the stock eventually recovers, you’ll be far more in the green.
Buy safe stocks
While you should always carry out some research into the stocks you may consider purchasing shares in, this is especially so during a market downturn. It’s important to not get carried away by the hype and heavily discounted stock listings. Using DCA, you’ll be able to accumulate shares in stable companies with solid numbers to pull through.
It’s worth remembering that many investors will be buying and selling based on emotion during massive market moves. Step away from your portfolio and head outside if the swings become too much to bear. Time in the market is better than trying to time the market. Keep some capital at the side for when the market drops for you to inject funds and bolster positions.
Buy dividend-paying stocks
Dividends are amazing. It’s what makes investing (for me) far more enjoyable to see a steady stream of passive income alongside any capital gains that may be earned through holding shares themselves. Some companies pay out a portion of their earnings to investors in the form of a dividend, which can be paid out monthly, quarterly, semi-annually, or annually.
Should the markets crash and stocks tumble in price, you can still make some recovery gains through dividend payments. If companies are able to maintain the regular payments, this can help offset any unrealized losses — unrealized meaning losses you haven’t yet realized by selling the shares. Many of the more safe stocks continue to pay dividends, even through market crashes and are referred to as dividend aristocrats.
During a bear market (when the stock prices are falling), it may be a good idea to buy some bonds to diversify your portfolio alongside stocks and potentially some cryptocurrencies. Bonds are often viewed as safer investments that can increase in value as stocks fall. The inverse occurs when stocks are doing well, bonds usually see a drop in value.
Consider investing some in crypto
This may not be for everyone since cryptocurrencies themselves come with considerable risk. During market downturns, such commodities may be worth storing some of your spare wealth to hedge against inflation in your local market and native fiat currency. It can also be a good means to diversify your portfolio with additional room for growth.
On a personal level, I try to maintain 2% of my portfolio as crypto holdings, employing DCA as the prices increase and fall.