Investors Sell on Fear and Buy on Greed
Many don’t take the above comments to heart. It’s not easy to hold on to your investments when they fall 20, 30 even 40%. You start to lose confidence in your investing decisions. Then you start to wonder if there has been some seismic shift in the markets, and selling now could mitigate losses. Many who go this route stay out the market until the recovery is mostly over.
Remember the Internet bubble? Lot’s of investors talked about how the world was totally different with the Internet, and they used this lie to convince themselves to buy stocks of dot com companies with zero revenue. Remember the housing bubble? Folks would tell me that they are not making any more land, so prices must keep going up. Those folks are renting now and proclaiming that owning a home is NOT the financially prudent thing to do.
The point is that many investors do exactly the opposite of what they should do. When stocks are going up, they buy, buy, buy. When the markets crash, out of fear, they sell, sell, sell. This course of action is absolutley wrong, wrong, wrong.
How to Profit from a Bear Market
The simple and easy way to profit from a stock market crash is to do one of the hardest things in life: nothing. “Don’t do anything, just stand there!” is a great strategy for many, in my opinion.
Of course, this assumes that your asset allocation plan is appropriate for your investing horizon and risk tolerance. It also assumes that your investments have gone down because the market has gone down, not because you invested in some silly dot com company with no revenue.
I have continued to invest on a regular basis just as before, taking my normal amount of monthly pay to buy more stocks. I’ve taken a particular interest to some of the hardest hit sectors/companies to include cruise companies and airliners.
Resist any urge to sell stocks
Selling stocks in panic is the worst thing you could do after a stock market crash. Successful investing is about buying low and selling high, or more simply holding strong performing companies through the ups and downs. When you sell after a crash, you do just the opposite.
And if you think you can just cash out for now and then get back in when the market improves, consider this: You have no way of knowing when the market will swing back. And there is a big cost to missing just a few really good days in the stock market.
Buy stocks (if you were going to anyway)
The best time to buy investments is when you have money to invest. The best time to sell investments is when you need money for something else.
That said, if you’ve wanted to invest but have been dragging your feet for whatever reason, you might see the stock market crash as a buying opportunity. No, you don’t know if the market is going to go back up or continue to go down. But you do know this: Stocks are about 10 percent cheaper than they were last week.
Rebalance your portfolio after things have calmed down
After a volatile period in the market, the value of your investments may change enough to shift your actual asset allocation away from your target. There’s no rush, but big movements in the stock market are a good reminder to give your portfolio a checkup and consider redistributing your diversification.
Robo-advisors can help manage your money when the stock market is in flux
For unseasoned investors, this drop can be especially terrifying. But, it’s also not the end of the world. When you’re young, you have years to make up for stock market drops—so younger people as a group should be the least concerned.
Robo-advisors don’t react out of fear like we do. Through complex algorithms, they choose the best stocks and bonds for you, which can be especially helpful (and offer a lot of peace of mind) when the market is in flux and you’re panicking. They can be a very useful tool to take your emotions out of the equation and let the program do its thing.
A sudden stock market crash is unnerving, but it’s not a sign of imminent financial collapse and it doesn’t mean that stocks are no longer a good long-term investment.
Unless you need cash immediately (in which case it shouldn’t have been in the stock market in the first place), do NOT sell off your stocks after a crash. The best thing to do is nothing or buy some investments if you have money to do so. After things have cooled off, take time to review your investments and make any adjustments to bring your asset allocation back into balance.
That being said, there are some strategies you can take if you want to accelerate your path to financial freedom during a bear market: