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Market Crash Strategy Tips » Shrewd Investing for 2019

A good strategy makes all the difference

Most financial commentators and economists agree that the average trader will experience two major stock market crashes over the course of their investing career. We all know that there is a level of risk when we enter the market, but there are many ways to prepare. The shock of a -50% fall presents a massive challenge, but even at then, your market crash strategy can make a difference.

  • Stock market crashes will happen in your lifetime
  • You are more likely to manage if you are prepared
  • There are many survival strategies to consider
  • Some investors even prosper during a crash
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How to keep your cool if a crash takes hold

When you have spent years curating a profitable portfolio, it can be tough trying to work out how to take advantage of stock market crash. However, it is wiser to sit back and take a moment to think about the situation before you act. It takes seconds to sell your stocks, but stock market crashes can take months to ripen. It is likely that you will have plenty of time to choose a course of action and put it into practice, so resist the urge to start straight away. This is not just to avoid making any rash decisions, but also to learn more about the situation so that you can be more aware of the warning signs in future. The most substantial market tumbles do not occur while we are sleeping without any prior indications. In almost all historical crashes, the signs begin to appear way ahead of the event, so when it happens to you, try to locate the precise causes and the timescale involved. Think about any sectors that played a pivotal role and see how they are linked to the downturn. As part of this investigation, you can also look at the sectors around this one that have some kind of relationship with it. The worst crashes can rarely be put down to the behaviour of a single sector, so find out more about any associated sectors.

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Begin to react beforehand

As with so many things in life, being prepared in advance is crucial for anyone hoping to cope with a market crash. You should always be on the lookout for tell-tale signs of a potential problem, because leaving it to the last minute can result in expensive mistakes being made. If you see stocks are being sold for less, try to avoid the urge to bail out by following your plan. Write your plan down when things are going well, and then reread it before you make any buying or selling decisions. It can be tough to remain unruffled, but scared investors are a catalyst for even deeper crashes, even though the situation is not permanent. Global stock markets have persisted through wars, economic hardships and government coups, so they will bounce back and bring the value of your portfolio with them. If your investment strategy is long term, then you can plan to take little or no action during a crash, because you won’t be needing your cash for years. However, for people who are nearing retirement, it makes sense to assess your risk level and asset allocation. If you have a few risky investments, then transferring some of these to a more dependable area is wise. This type of evasive action means that the potential risk level of your portfolio is lessened prior to any market crash, so you have a better chance of enduring a downturn.

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Accept that crashes will happen – learn how to take advantage of stock market crash

It can be reassuring to know that making money on the stock exchange can continue after a crash. Even taking into account the odd dip, a portfolio that is appropriately diversified will provide returns of up to 10% per year, given enough time. The market has its bear and bull periods, but this is the nature of an industry that is rarely predictable. We all know that a crash is inevitable, but we don’t avoid buying stocks because some of the best returns can happen after a period of decline. In part, this is due to people liquidating their stocks when the market hits what they think is the bottom, for fear of larger future losses. Once the stock sale is over, traders who stayed calm and made a few shrewd purchases are in the money, but people who sold have some difficult decisions to make. They have to choose between buying back their assets at a higher price than they sold them, or hold back and pass up on their long-term growth. When you anticipate the possibility of a crash, you are ready to continue almost as normal with your trading strategies, but also benefit from the low-cost stocks that appear during a crash. Indeed, the legendary investor Warren Buffet advises traders to “attempt to be fearful when others are greedy and to be greedy only when others are fearful”.

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Check over your allocation

If you are not sure how your portfolio would perform during a crash, do not leave it until the last minute to find out. Your experience of the downturn and your returns will both depend heavily on how your allocation is set up. Asset allocation gives you the chance to minimise risk, because each class behaves in a different way from the others in a specific situation. A broker comparison would show that as one asset begins to fall in value, another may begin to increase. A well-balanced asset allocation may seem like a conservative strategy that attracts unimpressive returns, but it provides a high degree of protection in a crisis. Stocks alone are unlikely to do as well as a blend of assets and bonds, so if you need to make a change, do it as soon as possible. When you are at the top of your game and things are going well, it can be tempting to take an optimistic approach to your allocation. Therefore, it often pays off to be a little more cautious than you believe is necessary. You could begin by purchasing a number of lower-risk bonds, which generally cope well under pressure. Then think about adding a wider range of assets to your collection, including commodities, cryptocurrencies and gold.

Diversification – maintain a range of assets

Diversification should be a key feature of any market crash strategy, because downturns can be concentrated in a particular area. As it is almost impossible to pinpoint which area, you should make sure that your allocation includes a variety of sectors, classes and categories. This way, you won’t go down, regardless of which sector becomes stressed, because your other assets will keep you buoyant. Global economies are extremely fluid, with some sectors in a constant state of flux. The investors who take this on board and keep a diverse group of assets will be in pole position when the next crash hits. Whether the problem is focused around a particular geographical location or type of investment, when you strive to diversify, you will probably see that a number of your stocks do decrease in value in an unfavourable environment. However, when you have suitably leavened your allocation, some sections of it will also shine. By and large, it is the cheaper sectors of the stock market, good-quality bonds and gold that are safer havens. Managed funds are another type of investment to consider. Both ETFs and index funds can be purchased relatively cheaply, and with five or six of these, you will have amassed an impressive level of diversification. This may be a better choice for people who are just starting out, as curating a watertight collection of single bonds and shares is a complex, time-consuming task – even for the pros.

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Making money in bear country

Sometimes, when the market is at its most pessimistic, there is money to be made for wise traders. These are the fortunate few who have been ready for a crash and have put money aside to pounce on the cheapest assets when the prices have dropped below a certain point. Trying to predict the bottom price is impractical, but when you know the process has begun, you can prepare yourself. Once you have identified an investment that you believe has the potential to pay out in the long term, take the opportunity while it is going cheap. To ensure that you aren’t tempted by impulse buys, you should compile a list of the classes, stocks or individual bonds that interest you. If you are concerned about getting carried away and overstretching your finances, set yourself a budget for these opportunistic purchases. For the less experienced trader, the timings involved with this type of plan can be intimidating, but if you are prudent, the rewards make it worthwhile. As stocks begin to climb again, which they always do, the returns can be sizable. It is this lucrative prospect that drives intrepid investors to strike, when others are rushing to liquidise their assets or playing dead.

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Dealing with the aftermath of a stock market crash

Every crash that has ever occurred has turned back upward in time, so in the immediate weeks and months after a crash, it is important to be patient. Your emotions are likely to be frayed from an extended period of stress, so take some time out before you move in to assess your new situation. When you feel ready, start your review by evaluating how well your portfolio reacted. Learn more about which areas or sectors performed well and which struggled. If you discover that some of your assets have let you down when you were expecting more, then it may be a good time to sell up and find the best investments during stock market crash that could be more reliable. Having all of your money in stocks is never ideal, so you might want to consider purchasing a selection of bonds to soften any future crashes, as they are a fixed-income asset. Whatever you do at this stage, take a measured approach to selling or buying and only make small alterations to your core trading strategy if you are unhappy with it. You can consolidate your position by keeping the majority of your best investments during stock market crash but slowly purchasing a few new ones to slightly alter your course – if you feel that this is the right way forward. You won’t make extensive losses on your older stocks, but you can still progress toward a modified strategy, one that is capable of handling a crash.

 

Conclusion:

Conclusion: in order to prosper, plan ahead 

When you choose to become an investor, you have to accept the inevitability of a stock market crash – but you also have to be ready to learn how to take advantage of stock market crash. The crucial element of navigating your way through this testing experience is being prepared, both practically and emotionally. Traders who allow their emotions to influence how they invest, and when they sell, often suffer financially as a result – so be aware of your own weaknesses and try to train yourself to keep calm in the face of an uncertain market. Keep a diverse portfolio, try to maintain a balanced approach to losses, and learn to trust the data, rather than media scare stories. On the practical side, you should already have a trading strategy in place, and this should include a market crash strategy. None of us can dodge the effects of a crash, but if you can use this as a guide, when the time comes, you’ll be better prepared to weather the storm. With plenty of forethought and a portfolio with sufficient diversification, you can avoid becoming yet another panicked seller who is driving the crash even further down. With a rational plan to follow, you are less likely to feel overwhelmed by the task at hand and will avoid making the kind of mistakes that can ruin investors during a crash.

Stocks Highlights