Will the stock market crash this year? As my colleague Sean Williams points out, there are a number of concrete, data-driven reasons to think it will.
But even while certain metrics point to an imminent downturn, the reality is that we just don't know when the market will actually tank. It could happen later this year, at some point in 2022, or at another point in the future, and knowing how to handle a market crash could help you make it through one unscathed. With that in mind, here are three of the worst moves you might make when stock values plummet across the board.
1. Sell investments out of panic
It's unquestionably unsettling to see the value of your portfolio plunge overnight. But one thing you must remember is that you don't actually lose money in a stock market crash unless you liquidate positions and cash them out at a price that's lower than what you paid.
Say you own 10 shares of a given company's stock that cost you $100 apiece, or $1,000 total. If the market tanks, that position may drop to only be worth $800. Your initial thought process might be, “Rats, I'm down $200, better get out while I can.” But actually, you're not down that $200 in reality — you're only down that $200 in theory — unless you were to sell at that moment. As such, if you don't sell, you won't actually lose any money.
2. Avoid buying new stocks
When the stock market is volatile, your first instinct may be to stay away from it to avoid getting hurt. But actually, some of the best buying opportunities you'll ever come across could happen during a market downturn, when stock values plummet across the board.
Say you've had your eye on a particular stock that's been trading steadily at around $200 a share. If the market loses 20% of its value broadly, that stock may become available at $160 a share. But if you pledge not to buy any stocks, you'll lose out on that opportunity.
3. Buy stocks that don't align with your strategy simply because they're on sale
It's tempting to buy stocks when they're offered at a discount. But one thing you shouldn't do is scoop up stocks simply because their share prices have declined. Rather, only buy stocks you actually want to own and align with your investing strategy and goals.
Imagine you've been eager to diversify your portfolio with some tech stocks. If a few go on sale during a market downturn, great, scoop them up. But if you're already invested heavily in tech stocks to the point where you know you need to move away from them, then you shouldn't necessarily add more tech stocks to your portfolio just because their price has declined.
Along these lines, you should always vet a stock thoroughly before adding it to your portfolio, and this advice applies during market crashes, too. Don't assume that a stock is a great deal just because it's available at a discount.
Though we don't know when the stock market will take its next tumble, it's fair to say that at some point in time, things will take a turn for the worse. The best thing you can do as an investor is prepare for that possibility by boosting your emergency fund, hoarding some cash to take advantage of buying opportunities, and reminding yourself over and over that the moves above are just plain unwise.
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