Experience and evidence alike shows us how severely bear markets test investor resolve, sabotage otherwise solid plans, and just plain hurt. We’ve also seen how damaging it can be to act on rash fear rather than rational resolve during market downturns. Just as we prepare for other emergencies by practicing how to avoid deadly blunders in the heat of the moment, here are 10 timely actions you can take when it seems like a stock market crash is underway. And frankly, even when it’s not.
1. Don’t panic
It’s easy to believe you’re immune from panic when the financial sun is shining, but it’s hard to avoid indulging in it during a crisis. If you’re entertaining seemingly logical excuses to bail out during a steep or sustained market downturn, remember: it’s highly likely your behavioural biases are doing the talking. Even if you only pretend to be calm, that’s fine, as long as it prevents you from acting on your fears.
2. Redirect your energy
No matter how logical it may be to sit on your hands during market downturns, your “fight or flight” instincts can trick you into acting anyway. Fortunately, there are productive moves you can make instead – such as all 10 actions here – to satisfy the itch to act without overhauling your investments at potentially the worst possible time.
No matter how logical it may be to sit on your hands during market downturns, your “fight or flight” instincts can trick you into acting anyway.
3. Remember the evidence
One way to ignore your self-doubts during market crisis is to heed what decades of practical and academic evidence have taught us about investing: capital markets’ long-term trajectories have been upward. Thus, if you sell when markets are down, you’re far more likely to lock in permanent losses than come out ahead.
4. Manage your exposure to breaking news
There’s a difference between following current events versus fixating on them. In today’s multitasking, multimedia world, it’s easier than ever to be inundated by breaking news. When you become mired in the minutiae, it’s hard to retain your long-term perspective.
5. Revisit your carefully crafted investment plan (or make one)
Even if you yearn to go by gut feel during a financial crisis, remember: you promised yourself you wouldn’t do that. When did you promise? When you planned your personalised investment portfolio, carefully allocated to various sources of expected returns, globally diversified to dampen the risks involved, and sensibly executed with low-cost funds managed in an evidence-based manner. What if you’ve not yet made these sorts of plans or established this kind of portfolio? Then these are actions we encourage you to take at your earliest convenience – seek professional advice from a regulated independent financial adviser.
6. Reconsider your risk tolerance (but don’t act on it just yet)
When you craft a personalised investment portfolio, you also commit to accepting a measure of market risk in exchange for those expected market returns. Unfortunately, during quiet times, it’s easy to overestimate how much risk you can stomach. If you discover you’re miserable to the point of breaking during even modest market declines, you may need to re-think your investment plans. Start planning for prudent portfolio adjustments, preferably working with a regulated independent financial adviser to help you implement them judiciously over time.
When you craft a personalised investment portfolio, you also commit to accepting a measure of market risk in exchange for those expected market returns.
7. Double down on your risk exposure – if you’re able
If on the other hand you discover you have nerves of steel, a stock market crash can be an opportunity to buy more of the depressed (low-price) holdings that fit into your long-range investment plan. You can do this with new money, or by rebalancing what you’ve got (selling appreciated assets to buy the underdogs). This is not for the timid! You’re buying holdings other investors are fleeing from in droves. If you’re able to do this and hold tight, you’re especially well-positioned to make the most of the expected recovery.
8. Tax-loss harvest
Depending on market conditions as well as your own circumstances, you may be able to use tax-loss harvesting to turn financial lemons into lemonade during market downturns. A successful tax-loss harvest lowers your tax bill without substantially altering or impacting your long-term investment outcomes. This action is not without its tricks and traps, however, so it’s best done in alliance with a financial professional who is well-versed in navigating the challenges involved.
9. Revisit this article
There is no better time to re-read this article than when today’s “safety drill” is no longer an exercise but a real event. Maybe it will take your mind off the barrage of breaking news.
10. Talk to us
We don’t know when the next stock market crash will come. We don’t know how severe it will be, or how long it will last. Sooner or later, we expect a stock market crash to occur, just as we also expect it’ll eventually recover and continue upward. We hope today’s drill will help you be better prepared for “next time.” We also hope you’ll be in touch if we can help. After all, there’s never a bad time to receive high quality financial advice.