A market crash could happen at any time. It's a natural part of market cycles, although it's difficult or impossible to predict exactly when one will occur.
Crashes can be scary. After all, no investors like to see the value of their portfolio decline. But if you avoid making common mistakes when they happen, you can usually end up protecting the value of your assets.
In particular, there are two errors it's crucial to avoid.
1. Panic selling
When you see the price of your assets fall, it's easy to get nervous and assume the decline will worsen. You might even be tempted to sell to try to limit the damage.
But in most cases, this is exactly the wrong move. If you sell during a crash, you'll be unloading your shares when prices are down. And by doing so, you'll lock in your losses while missing out on the chance to see your portfolio recover when prices rise again.
If you've purchased high-quality investments that you believe have solid long-term prospects, chances are very good your investments will bounce back when the market begins its turnaround (even if you can't know exactly when it will happen).
If you just stick with the program, any decline in share price during the crash will be temporary, and your investment hopefully won't just return to the pre-crash price but also continue to increase in value during the recovery. Any losses you experience on paper during the crash will be replaced by gains.
Of course, if you don't have investments you're comfortable holding onto during a prolonged downturn, you'll have a more difficult choice to make. That's why you should avoid short-term trading in the hope of making quick profits. You never know when this strategy will backfire if a crash occurs, and you're left holding shares of companies you can't count on to make it through tough times.
2. Cutting back on investments
When you see the market start to crash, you may also decide it's too risky to put money into it, so you pull back on your investing. Or you might want to pause investing during the decline and wait until the market hits rock bottom before you make your move.
Unfortunately, reducing the amount you're investing during a crash can be a huge mistake. It's really difficult to predict when a recovery will begin — and sometimes this happens very quickly. If you're attempting to time the market, you could miss the chance to get in before prices rise rapidly.
And as far as being nervous about buying during a crash, remember that it doesn't matter if the value of your assets temporarily declines on paper as long as you're buying high-quality investments.
By consistently buying during a downturn, you should get the opportunity to purchase at least some shares at prices that are depressed due to the crash. Cutting back on investing would mean giving up this shot at getting shares at a bargain.
So to make sure the crash doesn't affect your portfolio too drastically, you'll want to stay consistent — put money into the market and avoid selling the assets you currently own. If you keep investing steadily and hold your positions long term, you'll be a lot better off in the end.
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