Nobody can blame investors who are trembling nervously in anticipation of a future market crash because the market is uneasy due to continuous inflation, interest rate hike hysteria, and geopolitical risk. Fortunately, it would be impossible to predict with any degree of confidence the likelihood of a crash, thus worrying at any given time would be pointless.
That probably doesn’t give you much comfort. But if you have a plan for what to do and what not to do in the event of a collision, that will be comforting. Let’s focus on three things you should definitely avoid doing if the market is chaotic for the time being.
Panicked selling of stocks
If the stock market crashes, the first (and most crucial) thing you shouldn’t do is sell all of your stocks in an effort to limit your losses. Selling in a panic is problematic since it seems like the proper course of action. After all, the market’s 30% decline might only result in losses of 10% for you if you can reduce your losses quickly enough.
Selling reduces your anxiety over not having control over the issue and your concern over financial loss. Additionally, you might even give yourself a pat on the back if you hear from friends or family members about how much they lost by holding onto their shares.
However, you’ll probably wind up missing the subsequent rebound. And in many circumstances, that implies that you will earn less money than you would have if you had simply stuck with it. As an illustration, let’s look at AbbVie’s (ABBV 0.96%) performance during the coronavirus collapse in March 2020.
As you can see, both the market and AbbVie’s shares suffered during the crash. However, because the pandemic, which served as the crash’s catalyst, had little to no impact on the company’s ability to carry out its business of creating and marketing pharmaceuticals, its stock swiftly recovered.
It completely undid the earlier harm within a few months and began to outperform the market. Even still, the stock finished the year substantially higher than it had begun, and if you had sold your shares, you would not have realized that profit. Even if you attempted to resume your position, it would be difficult for you to time it properly, and you would almost probably lose out on some benefits.
Absolutely no assurance can be made that all stocks will react in the same manner as AbbVie’s did throughout each market meltdown; many won’t. However, selling is likely to be a bad idea in circumstances when the crash isn’t the result of anything that fundamentally affects a company’s capacity to generate revenue as effectively as it does right now.
Change your investment approach significantly without justification
In line with the aforementioned, the second thing you shouldn’t do in the event of a stock market meltdown is to change your investing strategy without giving it some serious thought beforehand. Crashing is a common occurrence that is frequently caused by national or international events. However, it should be improbable that any one trend or event will leave all of your stocks actually vulnerable to further falls at once if your portfolio is appropriately diversified. Thus, even after a crash, any adjustments to your strategy should be minor.
Consider the scenario where, prior to the pandemic, you held shares of AMC Entertainment (AMC -7.77%) in the same portfolio as your AbbVie securities to gain exposure to the entertainment sector. Because of concerns about the coronavirus, the market crashed in March, and AMC’s share price took a significant damage. You were a wise and foresighted investor at the time, holding onto your stock. However, you decide to sell your shares after conducting a quarterly assessment of your holdings since you believe that movie theaters are unlikely to make a significant recovery while the coronavirus is still active.
So far, so good. However, when fresh information renders your initial investing thesis inaccurate or obsolete, it’s critical to modify your strategy.
However, many investors could make a mistake if they decide to spend their AMC sale profits in a way that diminishes the level of diversification in their portfolio, such as by purchasing more shares of AbbVie. This is a significant divergence from your previous strategy, which involved purchasing shares in the entertainment sector in order to gain exposure to the sector’s potential growth. And by doing so, you’re tossing the baby out with the bathwater, which in this case is AMC’s underwhelming stock after the crash, along with your well-founded need for diversification.
Play it safe and observe
The third thing that investors shouldn’t do in the event of a market meltdown is to wait it out until conditions are more stable. Instead, they ought to move to purchase shares now, while they are still at a discount. And that is especially true if you intend to build up your investments using the dollar-cost averaging strategy. If you have some money saved up, you may be able to take advantage of sudden, panic-driven downturns to add to your holdings by purchasing shares at steep discounts, provided your original investment thesis is still true.
If you choose to stay out of the market during a crash or correction, you won’t be actively decreasing the value of your portfolio, but you’ll probably miss out on growth. When a stock is down and it appears like the sky is falling, it might be terrifying to acquire additional shares, but renowned investors like Warren Buffett do it. Additionally, buying rather than holding on to shares of dividend-paying firms like AbbVie will secure shares with higher dividend yields than you may typically obtain, allowing you to benefit from your wise choice to seize a great deal for years to come.
