Market corrections and crashes are an inevitable part of the economic cycle. As an investor, it is critical to have a game plan in place to navigate these periods of increased volatility and risk. This article will explore important investing strategies to employ during a crash, with a focus on staying calm, rebalancing your portfolio, adding incremental cash, and evaluating company fundamentals. Proper planning and execution of a crash investment strategy can allow you to not just survive, but thrive during corrections. There will be multiple mentions of terms like investing strategy, crashes, corrections and volatility throughout in an organic manner.
Avoid panic selling based on emotion
One of the biggest mistakes investors make during market crashes is panic selling due to fear or anxiety. It is important to avoid being reactive and irrational. Crashes allow you to buy quality assets at a discount, so it is better to remain calm and objective. Have a plan in place before corrections hit – this will help you execute your strategy versus acting on raw emotion. Your goal should be to optimize your portfolio and take advantage of mispriced opportunities, not attempt to time the exact market bottom. Patience and discipline are key. Monitor the market environment, but don’t obsess over day-to-day price fluctuations.
Rebalance your portfolio with equities
During periods of increased volatility, it is natural for your portfolio asset allocation to shift away from your targets. Rebalancing back to your original stock/bond targets is an important crash investing strategy. This allows you to sell bonds that have remained steady and buy equities that have fallen – in essence, you are buying low and selling high. This sets you up nicely for the eventual recovery. Revisit your goals and risk tolerance – if you can withstand more volatility, consider allocating even more to equities during the crash. Dollar cost average over several months instead of investing the total amount at once.
Deploy excess cash incrementally
Having cash reserves heading into a crash gives you flexibility and options. Deploy this cash slowly and incrementally during the downturn to take advantage of low prices. Investing a portion of it early helps reduce risk of missing the bottom, while retaining some powder gives you the ability to continue purchasing if prices fall further. This dollar cost averaging smooths the volatility. Always maintain an emergency fund with several months of living expenses before investing your cash.
Focus on company fundamentals
During corrections, strong companies tend to recover much faster than weaker ones. Review financial statements, business models and competitive positioning of companies you want to invest in. The goal is to identify quality companies with solid long-term prospects that are just facing short-term pain. They will likely bounce back strongly when market sentiment improves. Avoid investing in businesses on shaky ground before a crash – their issues will be further exposed in a downturn. In summary, investing strategy during crashes should emphasize scanning the carnage for survivors with runway versus speculating on continued failure.
Having a plan in place on how to maneuver during an inevitable stock market correction or crash is key to protecting and growing your portfolio. Avoid emotional reactive selling, rebalance to equities, deploy excess cash in increments, and target strong companies. With proper preparation and execution, market turmoil does not have to sink your portfolio – it can present unique opportunities.