I don’t know if you guys have heard, but the world is in shambles, and everyone is freaking the heck out. At least that’s what the news and social media would have you think. I’m not saying they are wrong. The coronavirus is having a significant negative impact on financial markets, as you’ve likely seen if you’ve taken a look at your investments. However, doom and gloom headlines mean more clicks and clicks are money, so…
Investing is scary. You are putting your money at the mercy of the markets, and when we see collapses like last week, it wreaks havoc with our emotions. All of us. I don’t care how cool some people play it through their not so humble brags about buying opportunities. Rational or not, we all feel losses. Money is an emotional beast!
The Impact of COVID-19
So why is the market crashing? It all has to do with the coronavirus, and it’s spread around the world. You might be wondering how a flu-like virus could be doing so much damage to the stock market. Think about what happens when you are sick. You’re not going to work (hopefully), you’re not going out to eat or going shopping, or to the movies. You’re basically shut up in your house, not spending money until you’re feeling better.
Multiply that by a whole bunch, and you get the current situation in China. China is the second-largest economy in the world, and it currently has almost 80,000 people with the coronavirus and another 780 million under various travel restrictions. That’s a whole lot of people not going to work and not spending money. So much so you have a lot of companies halting production in China, which is taking a toll on their stock prices.
Before the outbreak of COVID-19, the markets were doing well. That’s good news. The recent downturn stems almost entirely from the virus, so we can be hopeful that once that is under control, the markets will improve.
If we look at the market date from prior epidemics, we can see that there is usually a rebound. We can’t guarantee what’s going to happen post-coronavirus, but I find it somewhat reassuring that recovery happens in similar situations.
Tips to Handle a Market Crash
Now that we’re up to speed on why the market is crashing, I want to talk about strategies I use to handle a market crash. It’s all about striking a balance between the logic of knowing that down markets aren’t all bad and the emotion of watching your balances decline.
Ride It Out
Buy low and sell high. You know this. It’s the golden rule of investing. So why does it have to be so damn hard?!
The best advice I can give you right now is to ride it out and let your investments recover as news hopefully improves. Selling your investments when they’re down is a guaranteed loss. There are times this can make sense. If a company you hold in is in complete ruins and there’s no hope in sight then it’s better to sell while it’s still worth something. If you’re invested in companies that have taken a hit because of market conditions but are still otherwise solid, then hang on to them. The fundamentals for buying are still good, and you’ll likely see a turnaround.
Tune Out The Noise
Stop checking your investments! If you are a social media addict like me, then it’s challenging enough to avoid all news, but it makes it so much more real when you look at how much your investments dropped. So just don’t. Trust your process and know you’ve done what you can to set yourself up for success. If you’re not selling anyways, then why bother even looking?
Ignorance isn’t always bliss, but sometimes its the best gift you can give yourself.
Take Advantage Of The Down
You know, that whole buy low thing we were just talking about. If you have money available, then adding it to the markets while they are down is not a bad idea. However, I’ve got some rules for you…
- Do not go into debt to invest. Ever. Leverage increases your investment risk by like 6 million times (not a real stat)
- Do not use your emergency fund. That money is potentially for short-term needs, and investing is for the long-term. We have no idea when or if the market will see a full recovery, so you need to keep yourself protected.
- Buy based on fundamentals and not based on discount. Just because something is ridiculously cheap doesn’t make it a good buy. That goes for shoes and stocks. Buy companies that have solid fundamentals, and you won’t regret it in the future.
Don’t Discredit Your Emotions
This one is important. Human beings are not all built the same. Think about skydiving for a second. Are you the kind of person who would jump out of a plane and plummet to the earth with just a piece of fabric preventing you from certain death? I’m not, was it obvious? There are people out there who think skydiving is an incredible rush. I am 99.99% positive I would pass out and die. People don’t judge me for that though. It’s normal to be scared of skydiving.
So why isn’t it normal to be afraid of risk in the stock market? Sure, it might not be life or death, but money is pretty damn important to living a good life. Being risk-averse is entirely normal. There is nothing wrong with buying low-risk investments and earning average returns for the rest of your life. Honestly, you’ll likely end up further ahead than the people who take too much risk. Often they will hit the jackpot on one stock pick and lose it all on the next.
Your risk tolerance should justify your investment choices and not the other way around. And the only way to understand your risk tolerance is through experience. I’m much riskier when it comes to my investments than I am when it comes to skydiving. I can handle the ups and downs, but that’s not the case for everyone. If this market downturn has you losing sleep, then it’s time to make some changes. Not right now. If you can, ride it out this time, but once things improve, then you should move into lower-risk investments.
Prepare For Next Time
And that’s where we get to preparing for next time. Markets go up, and markets go down. This down was significant, and likely the worst drop most of my readers have seen. Remember how this makes you feel. I know, kind of hokey right. Bear with me!
Once we see some recovery, you should look at your investments and see if any rebalancing needs to happen. Were you feeling super stressed out? Lower the risk. Did you barely notice anything happened? Up the risk a bit. Are you well-diversified, or do you have a lot weighing in one or two-sector? Spread things out.
Diversification and risk will go a long way in keeping the volatility to a manageable level. Manageable for you. Not that crazy person who thinks skydiving is the best thing ever.
I hope this helped you understand how to handle a market crash. Need more advice? Maybe a pep talk to stay the course? I’m here for you!
This post was proofread by Grammarly.