Market crashes are unavoidable. It is a natural phenomenon that happens in every econony. It is absolutely essential for us to be ready and know what to do in case a market crash happens. In this article we will show you ways on how to brace yourselves in the market crash.
A bear market refers to a market-wide decline in stock prices of at least 15-20% coupled with a pessimistic sentiment about the market. Clearly, these times are nothing to look forward to, but fighting back can be dangerous. Don’t despair—there is hope! Here we will walk you through eight important investment strategies and mindsets to help you stay calm and play dead when the stock market takes a swipe at your returns.
Keep Your Fears in Check
There is an old saying on Wall Street: “The Dow climbs a wall of worry.” In other words, over time the Dow has continued to rise despite economic woes, terrorism and countless other calamities. Investors should try to always separate their emotions from the investment decision-making process. What seems like a massive global catastrophe one day may be remembered as nothing more than a blip on the radar screen a few years down the road.
Investing is important, but so is eating and keeping a roof over your head. It’s unwise to take short-term funds (i.e. money for the mortgage or groceries) and invest them in stocks. As a general rule, investors should not get involved in equities unless they have an investment horizon of at least five years, preferably longer, and they should never invest money that they can’t afford to lose. Remember, bear markets, and even minor corrections, can be extremely destructive.
Look for Value Stocks
Bear markets can provide great opportunities for investors. The trick is to know what you are looking for. Beaten up, battered, underpriced: these are all descriptions of stocks during a bear market. Value investors such as Warren Buffett often view bear markets as buying opportunities because the valuations of good companies get hammered down along with the poor companies and sit at very attractive valuations. Buffett often builds up his position in some of his favorite stocks during less-than-cheery times in the market because he knows the market’s nature is to punish even good companies by more than they deserve.
Take Stock in Defensive Industries
Defensive or non-cyclical stocks are securities that generally perform better than the overall market during bad times. These types of stocks provide a consistent dividend and stable earnings, regardless of the state of the overall market. Companies that produce household non-durables — such as toothpaste, shampoo and shaving cream — are examples of defensive industries because people will still use these items in hard times.