If you’re experiencing your first stock market crash, don’t panic. It is normal for stock market crashes to happen periodically.
Historically, bear markets don’t last and the stock market tends to recover in time.
Instead of panicking and selling off your portfolio, here’re 7 ways you can take advantage of a stock market crash.
Stay calm. You could use some of these to position your portfolio to capture greater returns once the bear market is over.
10 ways to take advantage of a stock market crash
Taking advantage of a stock market crash can be a complex and challenging task. Here are a few strategies to consider if you’re looking to capitalize on a market downturn:
1) Dollar Cost Averaging
Dollar-cost averaging is an investment strategy where you invest a fixed amount of capital in regular intervals, over a long period of time, regardless of market conditions.
If you have been doing dollar cost averaging (DCA), continue to do it – it is most advantageous to do DCA when the market is crashing. In fact, it is the only time it would beat lump sum investing.
You must continue and not stop.
Each month with the same amount of capital you can buy more stocks – $500 buys 500 shares when share price is $1. Same $500 buys 1000 shares when share price is halved.
Keep buying as long as you have income coming in.
Everyone says they would buy when the markets drop, but when the market drops you get overwhelmed by fear and anxiety. And so, many aspiring investors miss their opportunity to buy when the stock market crashes.
Use dollar-cost averaging to avoid being sabotaged by your own emotions.
2) Review your investment portfolio
Since your attention is already on your portfolio, take the opportunity to review your portfolio now.
If there are some stocks you wanted to buy but didn’t get the chance to buy, a crash often presents the opportunity.
But what if you do not have enough cash?
Look at your current holdings and sell those that are less attractive to the ones you want to buy.
Yes, you might sell them at low prices but you get to buy the better ones at cheap prices too. It is just our price anchoring, loss aversion, endowment effect and mental accounting that are playing tricks in our head. Aim to build a better portfolio.
3) Hold
If you find the market crash manageable, you can just hold onto your investments that are meant to be held long term.
If you have done your due diligence, you should be confident to hold on to the investments and ride out the crash. If you are right, the investments will recover and surpass the previous high.
You do not have to force yourself to make investment decisions in a bear market. It is absolutely okay to do nothing and just hold through the storm.
It’s way better than making a bad call by impulse selling or buying.
4) Build your cash reserve
While you’re watching the stock market crash on the sidelines, continue to save and build your cash reserves.
Having a cash reserve allows you to take advantage of investment opportunities during a market crash. When stock prices drop significantly, you’ll have ready funds to purchase stocks at lower prices.
5) Buy the dip
If you are holding more cash than stocks, you are in a good position but don’t waste it. You might think that you should wait as the market is going lower as each day passes.
The thing is that it is difficult to know where is the bottom and many people miss it:
Nick Magguilli shared in his book “Just Keep Buying” that buying during a >30% market drawdown resulted in great returns:
So, do your valuations and buy once they get cheap enough.
Of course, if you’re worried that the stock prices can go lower, you do not need to deploy all your capital at once, you can dollar cost average too.
6) Stop speculating, do your research!
If you have been speculating stocks and have no intention to hold them long term, you should own up and sell.
Don’t hold on to speculative stocks long term because a handful of them will not be able to recover to the price you buy. You have to realize the capital loss sooner or later, might as well sooner and you can redeploy the capital elsewhere.
Instead, learn how to identify fundamentally strong companies that are likely to weather the downturn and potentially recover when the market rebounds.
Look for companies with solid financials, a competitive advantage, and a history of resilience.
Understand how they make money, who their competitors are, identify the factors that could affect their business and more. Conducting thorough research will help you identify attractive investment opportunities that suit your portfolio.
If you’re not sure how to valuate stocks, this strategy could help you.
7) Consider index funds or ETFs
If picking stocks in a stock market crash is too stressful for you, consider low cost index funds or ETFs.
Investing in index funds or exchange-traded funds (ETFs) that track broad market indices can be a prudent approach during a market crash.
These funds provide diversification across multiple stocks, reducing the risk associated with investing in individual companies. As the market recovers, the value of these funds is likely to increase.
These index funds tend to also come with lower costs which means more money goes back into your pocket over time.
If you already are invested in well-diversified ETFs and unit trusts, continue to hold them long term. They are eventually tracking the markets and markets are resilient.
Some individual stocks may not survive but the markets always survive unless it is the end of the world. If so, we all die and it doesn’t matter anymore.
8) If you’re investing via an advisor..
If you only invest via an advisor, this is the time where you may find it comforting that someone is handling it on your behalf.
You may even want to talk to your advisor and get his or her recommendation. The advisor can also serve as a counsellor if you are feeling worried about your portfolio. He or she can think more objectively and make sure you don’t make rash decisions.
9) Ask if you really should be worried
If you are still working and have an income, you should not need any cash flow from your investments. Hence, any decline in your portfolio value is not impactful to your daily life. It also gives you the ability to establish a long investment horizon.
If you are a retiree who need to draw down your capital for living expenses, you should not have a large exposure to stocks as they are too volatile. But if you have built a dividend-focused portfolio, you can hang on to your investments as long as the dividends are consistently being paid to you.
And if you are still worried about losing a lot of money, close some positions and reduce your market exposure. I know it isn’t easy to cut losses but if you don’t, the worry will grow with the losses and eat you inside.
It is not worth losing your health over your wealth. No health, no wealth.
Get your priority right. Live and fight another day.
Some will say think long term and just hold. This is assuming you can mentally and emotionally able to handle the volatility.
We are all different and there’s no shame in doing the right thing for yourself.
10) Use your overall net worth as a yardstick!
Alleviate your anxiety by zooming out and look at your overall net worth.
In Singapore, the average household assets consist of over 40% in housing, 20% in cash and less than 5% in stocks. A stock market crash is not going to harm a typical Singaporean’s net worth.
Of course, the average can be misleading and you may have a bigger allocation to stocks. Even so, you will still have other assets to cushion the drop in stock value.
Zoom out and it might make you feel better.
It will also save you from reckless decisions which you might regret when the markets recover later.
What other moves can you make during a market crash?
I may not have covered all the scenarios but I hope you understand that a context is required before deciding what is the best course of action.
What is suitable for one may not be suitable for another because the context is different.
