What if the stock market crashed tomorrow? It could happen. What would you do? There are three very common things: Panicking, selling off your stocks, and then steering clear of the stock market for a long time — possibly forever.
Those are three of the worst moves you can make during a market crash. Here's a closer look at why you shouldn't panic, sell, and steer clear — along with some guidance regarding what you should do, because market crashes are actually excellent investing opportunities.
1. Don't panic
First, if the market crashes, don't panic. Stock investors need to expect volatility in the market and be braced for it. Over the 50 years from 1970 to 2020, there were 28 stock market crashes or corrections of 10% or more, including six of 30% or more. In some years there are several, and in other years, none.
When corrections and crashes happen, some of your holdings can drop by a lot. The overall market might sink by 20%, but one or more of your particular holdings could fall by 40% or more. For example, at the time of this writing, popular growth stocks The Trade Desk (NASDAQ: TTD), Twilio (NYSE: TWLO), and Redfin (NASDAQ: RDFN) were all down between 45% and 50% from their all-time highs. If you're going to invest in the stock market, you need to be prepared for such drops and to be ready to deal with them calmly, without panicking.
2. Don't sell in a rush
So how do you deal with stocks that suddenly plunge in price — or fall significantly over a few weeks or months? Well, if it happens along with a sharp or gradual decline in the overall stock market, you probably have little to worry about and should just hang on.
Many investors head for the exits when the market falls sharply — and their doing so, with all that selling activity, fuels further market declines. In such a situation, it can be tempting to join the crowd and sell many or most of your stocks. That's typically very much the wrong thing to do, though. Ask yourself whether the companies behind your stocks have really seen their prospects change and whether you think their intrinsic value has changed.
Selling can make sense if there has been a change in a company's competitiveness, in its financial health, or in its future prospects, or if there has been any other long-lasting or permanent change that makes it suddenly a less appealing investment. Otherwise, consider hanging on.
3. Don't forget — stocks are on sale after a crash
Not only is it generally best to hang on to your stocks during and after a market correction or crash, it's also generally best to buy more shares of stock. After all, a widespread market sell-off means that many great stocks are on sale. Consider trying to keep a small portion of your portfolio in cash, in order to have it ready should the market drop. (Don't keep gobs of your portfolio in cash for that reason, though — because the market may not drop for another year or two, and you can miss out on a lot of gains.)
Think of The Trade Desk, Twilio, and Redfin as examples. If you'd learned about them months ago and wanted to own shares, but found them a little pricey, now you may be able to grab some shares at prices that are 40% to 50% lower.
It can be very helpful to maintain a list or an online portfolio of stocks you'd like to own — a watch list. Check in on it now and then to see if any stocks of great interest are suddenly trading at more attractive prices. If they are, do some digging to make sure any issues they're facing are temporary.
Market corrections and crashes can be unsettling and even scary, but they can also present wonderful opportunities for level-headed investors who know not to panic.
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Selena Maranjian owns shares of Redfin, The Trade Desk, and Twilio. The Motley Fool owns shares of and recommends Redfin, The Trade Desk, and Twilio. The Motley Fool recommends the following options: short May 2021 $65 puts on Redfin. The Motley Fool has a disclosure policy.