What Investors Do When Stock Markets Crash explained by professional forex trading experts the “ForexSQ” FX trading team.
What Investors Do When Stock Markets Crash
The stock market can be a dangerous place, with fortunes being made and lost in the blink of an eye. While most investors are bullish overall, meaning they expect the markets to go up, in some economic and political environments even the most seasoned investors get skittish. When top investors feel the market is going down in the near future, here are five common steps they might take.
Liquidate Risky Positions
When some investors sense danger ahead, they follow along with the general sentiment and sell investments.
Smart investors start by selling risky positions, easy to spot with a high beta or new business model. Others sell even some of their most stable companies as a protection against losses.
However, experienced investors do not follow the nervous investors who rush to sell everything and sit at the sideline. If you sell everything, you are likely to miss out on the big gains if the market falls and recovers. Instead of selling everything, top investors just sell the risky stocks and positions from their portfolios while holding on to the stable, Blue Chip companies.
Some top investors leave their portfolio alone, but stop reinvesting when cash balances grow. If the investors are heavily invested in dividend stocks, they may turn off reinvestments and hold onto cash as a hedge against portfolio losses. After all, you know your cash position will never lose value if it is held in an insured account at a stable brokerage.
Hoarding cash allows you to weather the storm relatively unscathed if the markets turn sour. Even if your stocks lose a lot of value, investors with a large cash holding can safely wait out the bad market and wait for the perfect moment to begin investing again to ride the tidal wave upward that was caused by the recent crash.
Of course, hoarding cash is not a long-term solution, as low deposit rates and inflation will conspire to effectively give you a negative interest rates on cash holdings.
Move Into Fixed Income Investments
Some investors weary of stocks move their funds into fixed income investments when the markets look unstable. Fixed income investments, also known as bonds, come in many flavors. Bond prices tend to move inversely to the stock market, so when stock prices fall, bond prices rise.
The bond market is made up of different varieties of debt securities including corporate bonds, government bonds, and municipal bonds. Corporate bonds are debt instruments issued by large corporations. Government bonds come in different varieties. Municipal bonds are issued by local governments, and often come with a tax benefit.
Beware that if you bet big on fixed income investments, they will lose value if interest rates rise. In the current rising rate environment, you may want to avoid investing too heavily in bonds. While they will always pay out a predictable cash flow as long as the issuer doesn’t default, prices do rise and fall in the secondary market.
Buy, Buy, Buy!
Famed investor Warren Buffett once shared the following gem of wisdom: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” To regular investors, this means that when the markets are flying high and people are bragging about profits, a fall in market prices is likely in the near future.
When investors are fearful and worried about poor conditions, it is time to buy.
While there is a risk the bottom has yet to come, investing in a down market often pays off big. Doing so helps follow the “buy low” part of the adage to “buy low and sell high.” While it is certainly a risk, buying low when the markets are in free fall puts you in a position for big gains during the recovery.
Build Your Own Investor Blueprint
Every investor has his or her own unique strategy for dealing with poor market conditions. Whether you are following others who say the markets are going down, have your own hunch, or can see it in the news, do not rush and make a knee-jerk reaction. Instead, follow a slow and steady approach to your investment decisions and you will be on track for great investing success.
What Investors Do When Stock Markets Crash Conclusion
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