A sudden, rapid drop in stock prices is known as a market crash. A stock market crash can often create a sense of panic during which investors tend to get scared and sell their investments so they don’t have to face any further loss in portfolio value.
This may not be the best option as the stock market generally tends to wipe out losses and stage a multi-year bull run after every crash.
It is also impossible to time the markets which means investors lose the opportunity to create wealth when the market recovers. Though market crashes aren’t easy for anybody, investors can utilize these corrections in a positive way and apply different techniques that can help them during the volatility.
Keeping this in mind, here are some strategies that investors can apply during a market crash.
Think before acting
You need to do your due diligence when you buy or sell stocks. Equities have the potential to create massive wealth for long-term investors which means you need to account for economic recessions and troughs when you buy a stock.
However, during a market crash, it is important that you keep an eye on your portfolio and look for signs a company displays that are not in sync with the market. For example, if the price of a company you own is falling rapidly compared to peers, then make sure that you know the reason behind it.
The airline sector experienced its best decade prior to COVID-19. However, the macro-scenario has changed drastically which will delay the recovery in the capital-intensive sector by a few years. This was a major reason behind Warren Buffett’s decision to exit the airline sector in April this year.
Look out for a market leader
According to The Motley Fool, many companies are available on a sale during a market crash. Several quality stocks trade at a cheaper valuation following a market crash, providing investors an opportunity to buy companies at a discount.
Often, small companies that cannot survive a market crash are acquired by the big players or they go bankrupt because of massive losses. This makes the market leaders a good option to look for in this period.
Buy aggressively, precision is secondary
This is an alternative investing trick that can prove beneficial to investors. Here, investors shouldn’t worry about when you should enter the market. If the stock prices are falling, it is difficult to anticipate or time a trend reversal.
It has been evident from the history of market crashes that “now” is the right time to buy aggressively. It may be tempting to wait longer and try to catch the market at its lowest, but this is not important for an investor with a long-term horizon.
Taking the long-haul perspective
We know that more than smartness, an investor’s patience counts while investing. If you are investing for retirement which is 20 years away, a buy and hold strategy will reap massive rewards, given the power of compounding.
You should always try to have some funds allocated in your ‘set it and forget it’ column of investments. This will save you from the whole stock market drama that includes greed and fear.
According to WealthSimple, to achieve this you can find an investment firm that lets you keep making automated deposits regularly. In this process, your investments will keep growing regardless of market behavior and you will be better off in the long run.
Focus on companies with strong fundamentals
A stock market crash impacts several companies across sectors. However, a company with strong fundamentals will always make a strong comeback sooner rather than later. You need to keep a lookout for companies that are market leaders, have a strong economic moat, a strong brand recall, and double down on these investments during a crash.
Shopify (TSX:SHOP) which is Canada’s largest company in terms of market cap, has returned close to 7,000% since its IPO in May 2015. However, the e-commerce giant has given investors multiple opportunities to buy the dip.
Even in 2020. Shopify stock fell from $700 in February to $370 in March. The stock is currently trading at $1,407. You should look at all the available information about a stock and a healthy company is likely to have stable financials allowing it to overcome a temporary pullback.
The Bullish takeaway
A stock market crash is scary and it is easy to panic and liquidate your holdings. But if there is anything that history has taught us, it is that a market crash is an opportunity to multiply your wealth and even accelerate your retirement.