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7 Expert Tips To Survive Your First Stock Market Crash
This stock market crash hit us so fast that very few managed to rebalance portfolios in time and cut losses. But let me tell you: I survived the market crash of 2008. And I have spent a lot of time analyzing similar events in the past. So, now I am here to share the lessons I have learned with you.
What qualifies me to help you? I have a lot of money stuck in the markets too! And I have been looking at the markets with as keen an eye as any.
Have you ever met a friend who is grieving the loss of a loved one? As you comfort them, you have to let your friend go through the process while not damaging themselves. That’s what I am here for today. I can’t make your losses in this stock market crash go away. Nor can I offer a secret strategy to turn them into profits. What I can do though, is help you find your true north amidst this chaos and survive.
In a stock market crash, wise investors are survivors.
A typical investor spends days researching where to invest. The process involves monitoring news, reports and analysis, and a little informed speculation. But it doesn’t end there. Once invested, one also has to track the performance of their investments. Rebalancing to ensure maximum gains is also important.
The journey is full of ups and downs and as a true survivor, an investor rallies on without losing hope for a better tomorrow. And then, something like this pandemic-induced stock market crash happens. All the hard-earned confidence gets replaced by fear and uncertainty. Sounds like you? I went through a similar situation before I decided to use logic and analysis to figure out my next steps. Here are some questions that I asked during my analysis:
Why do the markets crash during events like a pandemic?
Panic-driven selling. Whether it was the housing bubble crash of 2008 or the dot-com crash of 2000, panic has been a common thread. When investors start panicking, they tend to become irrational and go on a selling spree. This indicates the state of investor sentiment. Panic selling is usually not the best indicator of a country’s economy.
With COVID-19, most countries have closed borders and businesses to ensure social distancing. Trade came to a grinding halt. Fear and panic were the most-logical outcomes of such a situation. And when emotions run high, logical thinking takes a back seat.
Many people assume that markets will correct themselves only after the economy revives. Past crashes show that markets usually overreact to left-field events. Recovery, in fact, begins before the worst is over.
What should investors experiencing their first stock market crash do?
If you have not gone through a stock market crash before, then you have not truly experienced the emotional roller-coaster ride this can be. Despite being good with words, I find it difficult to do justice to what you might be feeling right now. But trust me, I have been there and I know how it feels.
The last decade has been comparatively kind to the investor community. If you have started investing during this decade, then these two months might have come as a huge shock! Before talking about how you can survive this crash, I want you to remember that such periods don’t last too long. Investment is a lifelong journey and markets have recovered from their worst crashes in 1.5 years or less (on average). Even though that sounds like a long time (considering every day feeling like a month), keeping your investment lifecycle in mind, this is a relatively fast expected recovery.
Here are some lessons that I learned that might help you survive this stock market crash:
1. Don’t fall prey to panic-selling
The first thing that most investors contemplate is selling their investments to reduce losses. It seems logical in a heightened emotional state – I purchased a stock @100, it had climbed up to 160 and is now reached 80 with a possible pandemic on the horizon. I should sell this stock and absorb the 20% loss rather than wait longer and suffer a bigger loss.
Sounds pretty logical, right?
However, here is the thing about investments – unless you redeem your investments, you only have a notional loss (loss on paper). This means that when the markets recover, this loss can reduce or even turn into profits. On the other hand, if you sell, you book the loss. Therefore, even if the market bounces back, you are in no position to cover that loss.
Also, many new investors believe that selling is the most logical thing to do rather than being ‘greedy’ and holding on. However, the fact is, investment is like a long road trip and taking a detour or canceling the trip because you hit a rough patch is not the solution.
2. Don’t go on a mindless ‘Bottom-Fishing’ expedition either
If panic-selling is one end of the spectrum, then bottom-fishing is the other. Let me explain:
Imagine a small lake where you go fishing regularly. You catch a few every time and have a hearty meal. The fishes are healthy because their ecosystem is in place. Now imagine an unfortunate time when drought hits and the lake starts drying. The fishes try to survive in whatever little water left.
A bottom-fisher goes to the lake at such times hoping to catch the difficult-to-find fish with ease since they are restricted to a smaller area. However, he forgets that since the ecosystem is disturbed, some fishes might be sick and unhealthy for consumption. So, while he might find some rare fishes, they might be useless unless he knows how to identify a healthy fish.
In stock markets, bottom-fishing is similar. When the markets crash, some investors enter the markets and mindlessly buy stocks without assessing their fundamentals (health). Since the stocks are cheaper, they believe that they are getting a good deal and don’t bother about analyzing anything else.
However, it is important to remember that like in the case of the lake, when markets go through events like the current pandemic, some companies can get affected worse than the others. When the dust finally settles, only those with strong balance sheets, great management teams, and a clear competitive edge emerge unscathed. Hence, while bottom-fishing can be an opportunity to find some good stocks, don’t be mindless about it. Assess and analyze what you are buying.
3. Invest slowly and strategically
Yes, you read that right. Despite what you might be feeling right now, this is a good time to invest. However, you need self-control and discipline to make the best out of this opportunity. These are some important points so please pay attention.
4. Don’t speculate
If you talk to anyone today, they will have an interesting view of how the economy and the markets will recover from this situation. I have heard some interesting speculations. One, which I would never forget is:
Because of the pandemic, people are being forced to stay indoors. This means that couples will get more time together. Hence, one should invest in baby product-related companies as the December 2020 – February 2021 might see a spurt in childbirth.
I remember hearing this from a friend and couldn’t help but imagine the extent to which people can speculate! 🙂
I feel that speculation is the root cause of all losses. If investors stuck to facts, then they could keep their losses to a minimum. Also, during volatile times, speculation can cost you dearly.
5. Stagger your investments
Even if you study the fundamentals of a company and find one that can weather this storm, avoid all urges to make a lumpsum investment. Remember, these are unprecedented times and unless the pandemic is brought under control, things can change fast. Also, while I understand that lumpsum investing can generate amazing returns if your timing is right, the flip side can be heavy losses too. Drip feed your money into investments and keep a close watch on the developments as you go.
6. Re-assess and diversify your investment portfolio
Investing is a dynamic process. Over time, you take many decisions based on your financial needs and market conditions. Currently, the world is staring at a recession and a pandemic, together. This requires a rebalancing of your portfolio. Look at which securities are strong enough to retain and which ones you need to sell when the opportunity presents itself.
While selling might not be easy or logical, you can also look at investments that can help reduce the overall risks of your portfolio – diversification. Remember to invest in securities with no correlation with your portfolio to reduce risks. Avoid any hedging techniques as hedging during volatile markets can be counterproductive.
7. Keep a long-term view
The trick to surviving any disaster (financial or otherwise), is getting through it with minimal damage and keeping your eyes on the horizon. Remember, such times will test you – your resilience, patience, emotional control, and ability to remain optimistic despite the odds. If you start thinking short-term, then you will either fall prey to speculation or panic-selling or make erroneous emotion-based decisions. Hence, it is important to stay calm and look at the bigger picture.
The world will fight through this situation and the markets will recover. Those who plan their investments accordingly will eventually emerge victors.
Remember, markets have been and always will be volatile. This means that there will be periods when such crashes happen. It might seem like the end of the world but a calm and strategic approach will not just help you survive such crashes but also help you turn them into opportunities. I hope that this article helped to get a better grip over the situation and create a plan to survive your first crash efficiently. Do write back if you have any specific questions. Stay Safe! Good Luck!
This blog article has not been reviewed by the MAS. It is prepared solely for information purposes and does not constitute an offer or solicitation for the purchase or sale of units in the funds. This does not constitute any form of investment advice and Kristal Advisors (SG) Pte Ltd does not take into account your personal investment objectives, specific investment goals, specific needs, or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Kristal Advisors (SG) Pte Ltd.
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