What to Do When the Market Is Crashing

What to do when the market is crashing

I’m going to break this to you, the stock market is going to go down. There’s going to be a correction and it might even crash. That’s not an opinion, it’s a fact. That is the nature of markets, they go up and they go down, sometimes for no rational reason at all. Sometimes things are going so well that it’s hard to believe that a high-flying stock market might decline. The key to navigating efficiently through a down market is to be prepared before it goes down.

Plan Before the Storm

So first things first, what should you do before there’s a market sell-off? Well this would be easy to plan for if you knew when the market sell off would happen, but you don’t. So you have to prepare for the inevitable and the way to do that is to start saving cash when there’s a rising market. Don’t take your money out of stocks, but make sure you have some cash on hand and available. That may sound crazy, why would you not invest all available cash to take advantage of the rising markets? What if you miss out on the party?

Rising markets, specially if they have been going up for a while, have very few stocks that could be considered bargains. So whatever stocks you have are probably over priced as it is, and it’s more difficult to find value stocks to invest when prices are high. That is not to say that you should sell part of your portfolio to get some cash since that could have negative tax implications, but if you contribute cash regularly to a brokerage account it might make sense to pause any automatic purchases until you have built up an ample cash reserve.

The other thing to do before market volatility starts is to build a list of companies that you might want to invest in, but are currently over priced and trading above their intrinsic values. Building this list will save you time when its time to go buy stocks.

During Market Turmoil

Once the market volatility starts what you want to avoid is having to sell stocks and realize losses. But that shouldn’t be an issue if you planned before the storm and already have cash on hand. If you did your due diligence when you purchased the stocks in your portfolio the best thing to do during market volatility is likely to hold on to your stocks.

The other thing to do is dust off the watch list you built before the market became unsettled. The truth is that when there are market swings that is when the opportunity to find a bargain arrises, and you should be prepared for that event.

When You Are Ready

Reassess the stocks on your watch list. It is likely that those quality companies that you were keeping an eye on have been oversold and may be undervalued. That is the perfect time to confirm that the fundamentals you reviewed when you added the company to your watch list still show that it is healthy, and if the intrinsic value is above its current share price then buy the stock with the cash you have available.

What you should not do is try to time the market and make purchases and sales at just the “right time.” That is a losing battle that you will never master. You have to evaluate your purchase and sell decisions on the company fundamentals and whether they are trading below their intrinsic value or not. It just happens to be that most stocks are on sale when there are large sell offs. This means that you will find yourself doing what most investors are not. You will likely be buying more stocks when others are selling them and you may question your research. That is a perfectly normal position to find yourself in when becoming a value investor, but once you are comfortable with the amount of research you’ve done you will be waiting for market down turns to happen to put your purchase plan into action.

Posted in Fundamentals

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