Having a long-term investment strategy is one of the keys to financial freedom. However, what should you do when it seems that everything in the markets is going wrong?
Here’s what to do with your investments during a stock market crash in three simple steps:
If you’re a long-term investor a bit of market turbulence shouldn’t be a concern. This is a normal—even predictable—part of markets.
And if markets make significant drops in value, the prevailing advice is still “don't panic”.
During the 2008 stock market crash many people sold their stocks and investments in a hurry. They thought prices would not recover. It is a mistake most fiercely regret.
Historically, stock indexes have a positive trajectory, with booms and dips along the way. Just look at the Financial Times Stock Exchange 100 Index (FTSE 100) historic performance:
So if you want to sell, be strategic. Only sell stocks if you need cash immediately or you believe an individual asset may never recover from a specific crisis. For example, RBS did not recover from the crash in 2008, and share prices remain a fraction of their pre-2008 value.
2. Buy stocks
Resist the urge to sell stocks during a crash – but do consider buying more if it’s within your means and aims to do so.
Stock market crashes and dips rarely last for extended periods and often the market rebounds quickly. Already the markets have rebounded above pre-Covid levels.
Ideally, you have the means to capitalise on this phenomenon. If you are a savvy and seasoned investor you will have been setting aside cash for just such an occasion.
If you think you have missed your chance, there is always next time. History suggests stock market bubbles and global events will constantly crash markets and raise them up again.
If you want to start saving money for future opportunities, start budgeting for it as soon as possible. You can use Money Dashboard to see how you currently spend your income, where you can make changes, set budget goals and more.
When to buy more stocks: as a guide, if the market falls by 20% or more, it is a good time to re-invest.
3. Rebalance your investment portfolio
Diversification is the key to growing your wealth. This lowers your chances of ruin if any particular stock or sector drastically decreases in value.
After markets have calmed down a bit, it’s good practice to rebalance your portfolio. So take a moment to check in on your investments and see how the value is spread across your assets.
For example, for coronavirus portfolio rebalancing, Travel Company shares may never recover from the disruption of the pandemic. Assess which other stocks may be crippled by the current pandemic and make changes you feel are appropriate.
And for a more positive example, Tesla has done very well during the Covid-crisis. If you have been holding on to the company’s stocks during this year you may find Tesla and the technology industry as a whole now represents a bigger proportion of your portfolio wealth. In which case, you may want to make some changes to reduce that exposure and bring your portfolio back into balance.