Another tough day for equities could be a sign that the correction is materializing. First of all, do not panic, we have survived other collapses in the past.
Last Monday’s market sell off wasn’t just a day off for equities; it was the largest daily loss for the S&P 500 and the Dow Jones since last October.
Nothing extremely worrying for investors who have seen their losses recover quickly over the next few days. However, the magnitude of the pullback is a clear reminder that the market can collapse at any time, and given the staggering 80% gain of the S&P 500 recorded between last March’s low and this month’s high, a future slump. it could be much bigger than the 2% to 3% drop we saw on Monday.
With that in mind, here are the moves to take if the stock market crashes tomorrow (the moves are listed in order of importance). The next sell off of the market may not end like the first, so the advice is don’t be caught unprepared.
It’s certainly easier said now than doing it in the midst of a stock market crash, but don’t get too excited about a big sell-off. Some of the financial media do benefit from embellishing pullbacks and inducing full-blown panic, but it’s not like we’ve never seen and survived market crashes before. This will be no different. Most of the value of your investment portfolio will remain intact, provided you have quality stocks and your portfolio is well diversified.
Hysterical thinking never leads to good decision making. So before anything else, take a couple of deep breaths. It’s just temporary weakness.
Give up weaker actions
Assuming you’ve successfully calmed your nerves with a few deep breaths, let’s now take stock choices that are in your portfolio seriously.
Having growth stocks in your portfolio will get you quiet nights even in the face of a major retracement, but if you’ve picked up even some more speculative picks like meme stocks you should get rid of them as soon as possible.
An overwhelming sell-off will put almost any stock under pressure, regardless of their caliber. A strong pullback, however, can really reverse lower quality stocks.
Brush up on your checklist and create an entry plan
They are apparently two different steps, but in reality it is only one. Any one-day slump that triggers a longer sale is ultimately a buying opportunity, but you don’t necessarily have to start your search during these more heartbreaking days of slump. You should always keep a list of potential purchases on hand if and when their prices become attractive enough, but that price should be predetermined before a sell off occurs. Sure, you might not get into the stock’s exact bottom, but buying quality stocks at a good price will offer you the chance to make a lot of money as the market rises again.
Focus on the long run
If your gut tells you that a big one-day slump doesn’t really matter even if it’s a harbinger of a major correction, trust your gut because it’s probably right – any sell off won’t matter much in a year’s time.
This will be hard for some investors to believe, but the relentless rally since last March is not the market norm. Setbacks and even full blown fixes are actually pretty common. Between 2000 and 2019, the S&P 500 experienced pullbacks of 10% or more 11 different times, and fell nearly 10% two more times. Yet the benchmark US stock market still recorded net gains in 15 of those 20 years and produced an average annual gain of 6% over that 20-year period.
The point is, a strong sell-off is indeed something that a true long-term investor can safely ignore.
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