- by Monica J. Weissmann, CFP, CIM, MEE
What to do when markets crash? Survival tips for investors
What goes up, must come down, says the conventional wisdom. Nowhere is this more applicable than to the stock market. In reality market volatility is a normal occurrence. When the fluctuation is less than 10% it is called "market correction". When it is more than 20% it is called a "market crash". No matter what the name, market fluctuations are tough to handle.
Focus on the forest, not on the trees
Markets are impacted by fundamentals of the economy and businesses, geopolitical situations, unexpected events. People react to events and impact the markets, by trading extensively in short periods of time. There is an impact of the "herd (or heard) mentality". Market fluctuations are most of the times short lived. Markets, short term, are driven by people behaviours (reactions to events). Markets, long term, are driven by fundamentals of the economy. Comparing investing to a cruise over the big ocean, we realize that even the strongest ship will be rocked by a perfect storm. And passengers of the cruise may be instructed to put on their life jackets. But very seldom will there be a need to jump off the ship to save your life. The better idea is to stay on the ship until the storm passes. The same with the market crashes. Markets always recover. Always have and always will. How to manage in your particular situations is a totally different task, which requires making decisions, some of which are uncomfortable or difficult. Professional advice will help, because it is always easier to analyze things when the involvement is not direct even when there is a lot of empathy and compassion. Your financial advisor will be able to suggest course of action based on logic rather than emotion. Keep your eyes on your long-term investing goals and your overall portfolio; don't overestimate the effect of short-term price fluctuations on your portfolio.
When the market crashes and investment losses pile up, you may be tempted to pull out of the stock market altogether and look for less volatile investments. The low returns that are typical for low-risk investments may seem downright attractive when the markets are down and most of your investments are showing negative returns. This would be like jumping off the ship in the middle of the storm. You may be able to swim and you may have your life jacket, or you may be in a little boat, but the shore is so far that you cannot see it. Is there a shore somewhere? Will you be able to make it to the shore? But before you leap into a different investment strategy, keep in mind that although past performance is no guarantee of future results, stocks have historically outperformed all other types of investments over time. If you move most or all of your dollars into conservative investments, you've not only locked in any losses you might have, but you've also sacrificed the potential for higher returns.
Look for the silver lining
Remember after the storm you can see the rainbow. A down market, like every cloud, has a silver lining. The silver lining of a down market is the opportunity you have to buy shares of stock at lower prices. Whether you do that using a lump sum or preferably using "dollar cost averaging" you will be glad you did it and learn a lesson for the future that will ease your heart ache whenever the market will fluctuate again.
Do not try to time the markets. Do use patience.
Stay safe. Stay invested. Talk to your trusted financial advisor.
