The famous saying goes, what goes up, must come down. This is indeed true about stock markets.
So what is a stock market crash?
Let’s be clear first as to what is really meant by a crash? Usually, when it does happen, you will not get a prior warning, and it often happens in major and developed markets (so not the Bovespa exchange) in Brazil. And when it does happen, it will not just affect stocks – currencies, bonds, commodities and real estate can crash too.
In the event of a stock market crash you can expect the market to be down by anything between -30 to -60% and it lasts for some time, so it’s not a one-day event.
It is almost impossible to predict the next market crash accurately, so it will not be wise to liquidate all of your investments in anticipation of the next crash.
Every investor should have a memorized or written investment policy statement which states how, why and for how long each of their investments are being embarked on. Having this will certainly help you take the right decisions and seek the best advice from the experts. The whole idea is not to make any emotionally charged decisions during a crash, so you need your strategy and investment goals in place ahead of time.
What to do when a market crash does happen
The following are some steps you can follow to keep your investments on track.
Always good to remember that diversification by time, type, sector, and geography are your best friends. When one kind of security dips, another may be going straight up.
That means if stocks fall, re-balance by selling other asset classes and buying more shares. This practice ensures you will be buying on the way down and at the bottom. (Averaging)
Owning gold is a worthwhile hedge against uncertainty in the stock markets which acts as a good store of value. As an Example, between the start of the market crash in May 2008 and its end in March 2009, the Dow Jones lost 49% of its value while gold prices rose over 5% over the same time.
You don’t have to buy physical gold; investors can now easily buy a gold exchange-traded fund (ETF). Gold ETFs mirror the value of gold and can be bought just like any other stock, or investors looking for more profit potential from gold can buy gold mining stocks. As gold prices go up, owning gold mining company stocks gives you exposure to the precious metal.
Remember, never take investment advice from someone who predicts the future. That includes fortune tellers, grandmas, and others.
Crashes are ugly, brutal, and horrid and can create nervousness. But as mentioned above a crash in some or most major markets should be and is expected someday to occur, but it should not make you anxious.
By following and remembering the above-stated steps, you can get past a crash in much better shape than you entered it.
[Related: What’s your investment style?]