As markets continue to slide this year, you’ve probably seen plenty of chatter about recessions, bear markets, and the possibility of a full-blown stock market crash. But, what does this all mean for your investments and what can you do to prepare?
In this guide, we’re going to be talking about how you can prosper amongst all the doom and gloom. You’ll find out about what crashes involve for investors, and some tips for riding the storm safely.
Keep reading for all the details you need to know about the current state of markets or click on a link below to jump straight to a section…
- What is a market crash?
- Recent example of a crash
- Difference between a crash and a bear market
- How markets look in 2022
- How investors can prepare for a crash
- What else investors need to know about a stock market crash
This term gets thrown around a lot and there’s no textbook definition for a crash.
Generally, it refers to a sharp drop in the price of stocks and shares across a wide range of markets or indexes.
To be classed as a crash and not a correction, the decline usually has to happen fast. And, values have to go down by at least 10%.
A recent example of a stock market crash is what we saw in March 2020. As coronavirus came knocking on doors around the world, there was plenty of uncertainty.
Then, whoosh. Major stock markets around the world plummeted.
A useful measure is the FTSE All-Share Index which tracks major companies from across the world. In March 2020, it fell by over 30%.
This was quite a strange ‘flash crash’.
Because, quick reactions from governments and central banks (including plenty of ‘money printing’) led to a fast recovery in market confidence.
The result was that the bear market of 2020 was extremely short-lived. But now it looks like the chickens have come home to roost.
Understanding the little differences in the terms used will help paint you a clearer picture about what’s going on in markets.
Whereas a stock market crash refers to a fast drop in values, a bear market is a more drawn-out affair.
Bear markets are a prolonged decline in investment prices that eventually results in a 20% or bigger drop from recent highs.
So, the 2020 stock market crash led us straight into what we would class as a bear market. But we managed to recover and claw our way out pretty sharpish.
What we’ve been seeing this year is more of a classic bear market, where stock markets have been dropping down gradually rather than in one fell swoop.
Although we’re now in bear market territory for some markets, a further ‘crash’ from here is unlikely but not impossible.
What’s more likely is that prices continue to decline until a ‘bottom’ is found. These bottoms are impossible to predict, and we might have already hit it.
It’s only with hindsight we can look back and actually say with certainty what’s what.
An important point to keep in mind is that not all investments or markets will be affected equally during this downturn.
For example, here’s a quick look at the performance of some major indexes so far this year:
- S&P 500 – Down 13.5%
- NASDAQ 100 – Down 23%
- FTSE 100 – Up 1.37%
So, it’s not all terrible news. There are still ways you can invest whilst limiting your losses, or even making money.
Although a further crash or decline may not happen this year, it’s always worth being prepared.
By taking a few simple steps you can protect your portfolio and even prosper. Here are some top tips to help you be a successful investor whilst everyone else panics:
1. Don’t panic
One of the worst things you can do when markets are down is to panic or make knee-jerk reactions.
When the paper value of your portfolio goes down, you only lock in those losses if you actually sell investments.
2. Check your pension
Many people often forget that their private pensions are actually invested in stock markets.
If you haven’t done so recently, now’s a great time to check through your pension and see what you’re investing in.
You may want to change your strategy or just check that everything is on track.
3. Use the right accounts
When you’re making money with investments, you may not be concerned with costs.
But, when you’re losing money, it can be an ideal time to check you’re using the right type of account and platform.
Make sure you’re using a brokerage account with low fees for buying, selling, or holding investments.
It’s also worth ensuring you’re making the most of tax-efficient accounts like a stocks and shares ISA to protect your future returns from the taxman!
4. Make sure your portfolio is diversified
When markets drop, it’s not a great time to be selling investments if you don’t have too.
But, now is as good a time as ever to check you’ve got enough balance with your investment portfolio.
How you choose to arrange things will depend on your time horizon and tolerance for risk.
However, you should aim to hold investments across a range of asset classes. This gives you the best shot at surviving a stock market crash in 2022. Or any year beyond.
Try to include a mixture of:
- Stocks and shares
- Bonds and gilts
- Property (perhaps using REITs)
- Alternative investments
If your platform doesn’t let you access a wide range of choices, you might want to shop around for a different account.
For this reason, we’ve partnered up with multi-asset platform eToro. They have plenty of assets to choose from, making it easier for you to create more diversification within your portfolio.
5. Cut your losses
A stock market crash or a bear market can be the perfect time to carry out a Spring-clean of your portfolio.
An excellent way to do this is to take a look and ask yourself – if you were to start all over again today, would you buy those same investments?
If not, it’s worth considering giving them the chop.
When everything’s going up in value, we all find ourselves picking up some naff investments. Sometimes it takes a downturn for us to be honest and ask ourselves – what the heck were we thinking?
Mistakes are okay, it’s impossible to invest perfectly. But, there comes a time when it’s worth cutting your losses and consolidating your portfolio.
This way you’re just left with just the investments you truly believe in.
6. Look for buying opportunities
Being greedy when others are fearful can allow you to eventually prosper from downturns and stock market crashes.
A good way to think of these situations is like it’s a big sale. Sure, there are going to be junk investments that you shouldn’t buy just because they’re cheaper.
But, there will be some absolute bargains to be found.
A good rule of thumb is to apply the same logic as you would with regular sale shopping. If there’s an investment you were considering when prices were much higher, then now could be a great time to buy.
Not every investment will recover from a crash. But if you think the whole market will bounce back at some stage, you can use index funds to capture entire market movements.
Or, if you’re confident enough to pick out individual investments, you will likely find plenty of opportunities in a bear market to invest more heavily.
And hopefully, be rewarded for your adventurous spirit.
With inflation running so hot right now, investing more (if you can afford it) is a great way of putting your cash to work instead of letting it lose value.
If you’d like some investing inspiration, here are 5 smart ways to invest when inflation is high.
No one can know for sure how things will unfold, or when events will happen.
There’s always going to be a level of uncertainty when it comes to investing. So, the best way to make sure you’re in a solid position is to always be prepared for all outcomes.
Prior preparation means that you can run your portfolio on autopilot without freaking out if markets turn sour.
This year might be a bit of a wake-up call to investors that it’s not always plain sailing. Equally, a stock market crash or bear market isn’t the end of the world either.
Keep a level head and control the areas you’re able to. Don’t invite unnecessary stress into your life and always think long-term.
And, if you want to stay up to date with the latest market news and movements, make sure you sign up for the fortnightly MoneyMagpie Investing Newsletter.
This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.