A stock market crash happens when there is a sudden drop in stock prices. There are a plethora of reasons for which stock markets crash. Pandemic is one such exemplary event that explains the fall. The fall was histrionic and most of the investors were unaware. While it is impossible to predict a crash in stock markets, there are several things or good investment habits that you can learn to minimize its impact on your investment portfolio.
In this article we are going to discuss 7 important things you can do to reduce the adverse effects of a stock market crash on your investments. In addition you can join the sebi registered telegram channel for option trading to get experts advice on how you can survive market crashes.
1. Avoid Selling in a Panic
When the market crashes, many investors sell off their investments assuming that it will further erode their wealth. Markets can be influenced by negative news such as an asset bubble burst, pandemic, or geopolitical issues, etc. However, it is proven by the historical data that the longer you keep your investments in the market the better your chances to earn the returns.
This is one of the reasons why the timing strategy wont work well for most investors. It is important to remember that fear always leads to panic especially when you have invested money in the market and the market is crashing.
2. Avoid Buying in Panic
As it’s important to not sell your investments in panic, you should also not make panic buys during a market crash. When you buy in panic, you are in a state of mind that pushes you to make investments indiscriminately. Further it can become a barrier to reaching your present investment goals.
After all, when the market is crashing, it usually seems the favorable time to invest at reasonable valuations. It is when the investors often buy index funds and invest in Bluechip stocks. But they forget the key aspect of equity investing that is their risk appetite. This buying craze when the market is down can make you invest in the equities that are beyond your risk appetite.
3. Rebalance Your Portfolio
To provide better risk adjusted returns on your investments, you can use a strategy named as Portfolio rebalancing. It usually includes buying and selling investments after a period so that you can maintain the weight of each asset class as per your targeted allocation.
When you rebalance your portfolio, the first thing you should do is to have an asset allocation strategy in place. If you don’t have it already, a stock market crash will give you the best opportunity to take stocks of your present investments.These things should be kept in mind when you assess your portfolio:
- What am I invested in –Stocks, Bonds, Mutual Funds, or Gold, etc.
- What Is my investment’s value?
- What are my financial goals?
- What do I focus on when building my investment portfolio –growth of capital, consistent returns etc.
Once these questions are answered, you can have a target allocation in place for several asset classes. Also you can accurately decide your present situation. Then you can decide what investments you require so that you can buy or sell to reach the asset allocation target that you aimed for.
4. Take Advantage Of Tax Laws
The profits you generate by selling stocks or mutual funds are known as Capital Gains. If there is a fall in the stock markets it can be your best chance to increase the post-tax returns on your investment with the help of a strategy called tax-loss harvesting. It involves selling your stocks or mutual funds at a loss so that you can collect a capital loss. This loss can further be offset against capital gains from any other investment. It will decrease your tax burden and raise the value of post-tax returns from the investments.
5. Save Your Private Finances
A stock market crash not only influences the value of your investment portfolio but can also affect inflation, employment, consumption of goods, and much more. There are few things you should consider to reduce the impact:
- Create a Personal Cash Flow Statement: It is a record of all the money that is coming in and going out daily. By maintaining it you can regulate your finances better so that a stock market crash is unable to impact your essential expenses such as utility bills, rent, tuition fees, etc.
- Create an Emergency Fund: It is another way to protect yourself. If you don’t have an emergency fund already, create it as soon as possible.
- Manage Your Debt: Avoid taking any additional debt during a stock market crash.
6. Carefully Invest in Equities
When the stock market tanks, equities are cheaper. You can benefit from the low cost of equities by changing the allocation in long-term investments such as the Unit Linked Insurance Plans (ULIPs) and National Pension System (NPS). Both are long-term investments with a lock-in period of years.
Remember, when you make equity investments during a market correction period. You should research thoroughly. If you are not able to do so, it’s better to seek professional guidance.
7. Make Long-Term Investments
When you are investing in equities, short-term volatility is inevitable. It is solely dependent on you how the volatility affects you. But when you invest for the long term, these stock market’s ups and downs will not bother you. Hence you should keep a level head and avoid paying much attention to the market fluctuation in case of long term investments.
In addition you can invest in intraday trading and make a good return on investments by following the intraday trading tips.
The Bottom Line
A stock market crash gives you a unique opportunity to grow your wealth. However you need to have a perfect strategy to benefit from the crash. These 7 strategies discussed above will help you to survive a market crash better. Also, after the recovery of the market, these tips help you grow your wealth.
