Fears of the coronavirus has sent the markets tumbling over the past few weeks. Although the coronavirus is new territory for us, stock market turbulence is not. Most adults have lived through several at this point, but it doesn’t make them any less scary. They can happen overnight like in 1987, or over the course of a year as with the dot.com burst. They can be brought on by bubbles, specific industry practices like subprime mortgages or as we are now experiencing – pandemic.
No two crashes are alike but they all have one thing in common. The market recovered. No matter how devastating the losses were, or how long it took, the market recovered. Taking a look at this 100 year history of the stock market will give some perspective and show that crashes are more frequent than most people think. And it’s important to note that market booms are just as frequent. The market is cyclical and will always have turbulence.
No one can predict what will happen next, and how long this will last. But if history has taught us anything, it’s shown that the market recovers, and so do we.
Here are three things you can do (and not do) during a crash to minimize your losses and anxiety.
- Stay the course: You’ve probably heard this a lot by now and may be wondering what that actually means (and possibly are annoyed by the continued use of this phrase). “Stay the course” is a phrase often used in the context of a war or battle meaning to pursue a goal regardless of any obstacles or criticism. In the context of the stock market, it means to continue with your current investment plan. Investing should be for the long term and it is because of weeks like this. The stock market will always have turbulence, so it’s important that you ride out market cycles. If you are invested in high quality equities and your investments are based on a solid plan, don’t sell anything that you wouldn’t sell when there isn’t a crash. The only exception is when it’s clear that a company or niche industry isn’t going to recover, and then it may be time to cut those specific losses.
- Evaluate your risk tolerance: Your risk tolerance is an important part of your investment plan. It’s the amount of uncertainty you are willing to take on to achieve potentially greater rewards. It’s determined by several factors including your investment goals and experience, time horizon and other resources. The best way to gauge your risk tolerance is to take your pulse during a crash. How are you feeling? Are you considering selling everything and hiding your cash under the mattress? Then your risk tolerance may be lower than you thought. Once the market recovers and stabilizes (which it will), reevaluate your portfolio risk if necessary.
- Think carefully about investing during this time. There are experts who do nothing but analyze the market every second of every day. They can’t predict the markets, so you probably can’t either. Some are encouraging investors to get in while the markets low – but we don’t know how much lower it will go and how it will shake out in the recovery. There’s an investment saying called “Don’t try to catch a falling knife”, meaning there’s no telling what a security may do while falling. It can quickly rebound…or lose all its’ value and go bankrupt. I’m not saying don’t invest, but use caution. If you want to take advantage of low prices, consider a dollar cost averaging strategy. This is when an investor places a fixed dollar amount into an investment on a regular basis. The investment generally takes place every month (or other fixed time period) regardless of what is occurring in the financial markets. This type of investing can provide more price volatility protection than if you invested a large sum at one time.
Whether the market recovers quickly or years from now, the most important thing to remember is, it will recover. And so will we.