Smart investors know that stock market crashes are a natural part of the market cycle. But even with this knowledge, emotions can run wild in times of steep market decline.
So how do you keep your emotions in check in the face of a market crash? How do you fight off the urge to sell everything? Here are a few useful tips we hope will help.
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1. Stay away from the TV
We are currently living in an age of instant communication and information overload. Minute by minute, we are bombarded with news about events of all kinds, both good and bad. And while being in the know can be a positive thing, it can also be the exact opposite sometimes.
Being glued to your TV in the face of market crash is probably not a good idea. You’re almost certain to be confronted with alarmist and sensational negative headlines about the market. These will only stoke up your fears and sidetrack you from your long-term investment goals.
It might just be best to stay away from the TV during such times.
2. Focus on the long term
It can be scary to focus on the short term in the face of a market decline. That’s why it is a good idea to take a step back and stop thinking short term. Instead of focusing on how fast your portfolio might lose value, focus on the long term.
If you’re struggling emotionally, find some peace in the knowledge that regardless of short-term swings, the market generally has an upward bias in the long term.
Remind yourself that if you can hold on, the market will almost certainly recover. Once it does, you’ll not just recoup any losses incurred during the crash. You could also reap gains from your initial investment.
3. Remember past market crashes
The stock market has historically encountered many obstacles and crashes. We’ve had the Great Depression of the late 1920s, the October 1987 crash, the 2008 global recession (where the UK stock market infamously plunged 30%) and many others.
And each time, without fail, the market has recovered to claim new highs, proving that investing for the long term always pays off.
For a great lesson about the resilience of the stock market, you need look no further than 2020.
Back in March, major stock market indices across the world, including the FTSE 100, tanked due to fears about the potential impact of the Coronavirus pandemic on the global economy.
The markets have since rebounded with surprising strength and are slowly inching towards pre-pandemic levels. This is despite the world actually not being fully out of the woods yet in terms curbing the virus.
Investors who sold at the bottom back in March are probably kicking themselves and ruing their decisions right now.
4. Think of it as a sale or promotion
This might appear unusual, but another way to manage your emotions when facing a market crash is to think of it as a form of promotion or sale, just like the one your local supermarket will have once in a while.
The same way you look forward to picking up a few items for a bargain price during a sale, think of a stock market dip the same way.
During a dip, you have an opportunity to buy more stocks and shares for your portfolio at lower prices setting yourself up nicely for an almost certain market rally.
5. Talk to an expert or adviser
Talking to a financial expert or adviser can be of major benefit in the face of a market crash.
From helping to calm your fears to addressing any concerns you have about the status of your portfolio, an expert or adviser can help you see the importance of sticking to your investment plan and staying focused on your goals.
Another benefit of talking to an adviser is that it can give you an opportunity to re-evaluate your investment approach. You might realise, for example, that your portfolio is perhaps not as diversified as it should be.
Remember that diversification – spreading your money between different kinds of asset classes and investment products – is one of the best ways to reduce risk if your portfolio under-performing or losing money, especially in the face of a market crash.