Do market crashes hurt us?
Stock market shocks or crashes are part of market life cycles and market shocks are unavoidable. The market also needs some correction after a big rally, but honestly, as an investor, we need not worry about them. In the market crash, our portfolio also crashes but all of those are unrealized losses. Our investments only convert into losses after we sell them in the losses.
Source – Chartink.com
The above picture is a witness of how the market has recovered after the market crashes in 2008-09 and 2020-21.
During the market crash, everyone has the same question which is “What do we do now?” the simpler answer is, to do nothing, all we need to do is while investing. If you believe in your investment strategy, don’t need to change it, people sell in panic and often regret their decisions. “Nothing lasts forever”.
But we all know it’s not easy to watch our investment portfolio fall continuously along with the market but we can control the damages by taking some easier steps, so let’s discuss these steps.
Start early – Early investments helps to create higher wealth and compound your wealth rapidly. It gives more time to grow your investments and keeps you disciplined about your investment decisions. If your investment span is 20-25 years then 2 or 3 market crashes don’t affect your portfolio value.
Diversification – “don’t put all your eggs in one basket” is an old saying on the street that simplifies diversification. If our portfolio has huge exposure to one specific stock or sector then no one can save us from the concentration risk. If something went wrong with that particular stock or sector, our overall portfolio value will come down even if the market is performing better. While investing, we need to be sure that we do not invest a large chunk of money in a specific stock or sector and that our portfolio is well diversified. The over-diversification also hurts us as we add so many stocks from different sectors it is difficult to keep a track of all. Often our decisions go wrong.
Investment in fixed income securities – Like the diversification in sectors and stocks, we need to diversify our investment portfolio with investments in the different asset classes. While equity markets are struggling for most investors, fixed-income securities are safe houses. As the name fixed income securities suggests, they give you a fixed return on your investments. If you invested in both equity as well as fixed income securities your losses from the equity are set off by the returns from fixed income securities. In fixed-income securities, you can invest in corporate and treasury bonds and Bank deposits.
Avoid panic selling – During the market crash, negative news and bad sentiments influence many investors to get out of their investments even in the losses. After every crash markets have recovered. Because of some short-term challenges, don’t change your long-term strategies and be invested.
Good opportunity to buy? – Lower and discounted prices look tempting to buy and average out your investments but not every discounted price needs to be a good opportunity. Avoid panic buying. But market crashes allow us to add good stocks to our portfolio as most of the good stocks are traded at lower prices. Here we can use a staggered way of investing, we do not invest all our money at once we should make systematic plans to invest for when to buy and how much to buy because no one knows where the market is heading.
If we stick to our long-term investment strategy and avoid some silly mistakes the market crash doesn’t hurt more.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their research and analysis and should consult their investment advisors to determine the merit, risks, and suitability of the information provided.”
