How you can protect your portfolio in this market crash

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An estimated $4trn has been wiped off stock markets in the past few trading days in one of the most aggressive sell-offs ever recorded.

On Monday the Dow Jones Industrial Average recorded its worst one-day drop in history falling 1,175 points, that’s a more significant drop than was recorded in the darkest days of the financial crisis. That said, it’s a bit misleading to use this figure as a mark of how severe the daily decline was.

It’s all relative

In 2007, the index peaked at just over 14,000 compared to the recently printed all-time high of 26,600. In percentage terms, yesterday’s decline was a little less than 5% while the same decline in 2007 would have been equivalent to approximately 8.3%. The most substantial one-day percentage decline ever recorded by the index was Black Monday in 1987 when the Dow Jones declined 22.6%. Moreover, on no fewer than three occasions in 2008, the index lost more than 7% in a single day. In fact, in percentage terms, yesterday’s decline does not even rank in the top 20 largest ever drops. 

So the current volatility is not as severe as many media outlets are making it out to be, and it also appears as if the fall was nothing more than over-excited computer traders. Indeed, over the past month, as US and UK companies have reported their earnings for the fourth quarter and full year of 2017, a staggering 81% of US companies that have already reported have beaten Wall Street expectations for growth. Meanwhile, a large number of companies have struck an upbeat note about the future thanks to the Trump administration’s tax cuts.

With this being the case, it’s tough to argue that the fundamentals support a sell-off and that’s why I believe the best way to protect your portfolio in this market crash is to do nothing (apart from maybe buying some more shares in solid companies at a discount). 

Sit back and relax 

When stock markets are falling, plenty of investors find it difficult to keep their hands away from the ‘sell’ button, but this is exactly what you should do. For long-term investors, a one-day decline does not mean much over 10 years, and it also increases the risk that you will buy back in at a worse price. 

Countless studies have shown that investors are generally useless at market timing. Therefore, trying to time the market by buying and selling at the perfect moments to generate the best gains is a waste of time and effort that’s only likely to end up costing you money (both in extra commission and different prices paid). As noted above, while stock prices might be falling, the underlying fundamental picture remains robust, and over the long term, this should be reflected in equity prices.

Billionaire Warren Buffett has built his fortune by investing when others have been running away and holding on through thick and thin. In many ways this approach is lazy, but it works. When it comes to investing, investors are their own worst enemies as more often than not, it’s human error, not stock performance that holds back returns. 

All in all, the best way to protect your portfolio in this market crash is to keep calm, look to the long-term and keep away from that ‘sell’ button.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.