It’s the scenario that keeps many Americans from investing in the stock market: market crashes.
With some people still recovering from the 2008 financial crisis, it’s no wonder that scary headlines and a confusing media turmoil mean that many choose not to invest in the stock market because of a fear of future market crashes!
In a recent Bankrate.com survey, 7% of those surveys said that the main reason for not investing in the markets was because they were afraid of crashes. (See article on some of the most common investing fears and how iBillionaire can help crush them)
Unfortunately, market crashes do happen. They have happened in the past and almost certainly will happen again in the future. Here at iBillionaire we want to equip you with the knowledge of what to do when such a crash happens and more importantly, what not to do. After all, knowledge is king!
The number one piece of advice in the event of a market crash: DON’T PANIC.
Panicking is a natural reaction when things go awry, particularly if you start to see a drastic drop in the value of hard-earned savings. Freaking out will only cause more stress and as a result, your logical reasoning and processing power is clouded by a fog of emotion. If panic takes over and you decide to start rapidly selling stocks, you’re setting yourself up to lock in a loss. Yikes!
When our portfolio value goes down, we start to look around for advice, asking friends, family and advisors what we should be doing. Everyone around you is likely doing the same thing and before you know it you’ll be running around like a flock of headless chickens.
Instead, learn how you can refrain from committing the number one mistake when the markets go down. Let’s take a look at some of the ways you can prepare yourself for such a scenario so that you can come out top:
Hedge to Limit Your Loss
Hedging is one of the best ways to diversify your portfolio and to prepare for rapid fluctuations in the market. For example, a few ways to hedge against risks are by investing in financial instruments known as derivatives or to look into alternate investments like real estate. Avoid putting all your eggs in one basket!
Understand individual risk tolerance
Risk tolerance is loosely defined on a scale of Aggressive (can tolerate a lot of risk) to Conservative (less willing or unwilling to take risks). To work out your own tolerance level you need to take in a variety of factors: age, cash flow and personality being some of the key influences. Before you invest in the stock market you should know your risks and own personal risk tolerance level and so in turn prepare yourself for the market ups and down. By doing this, you can become much more confident and comfortable with your investing habits.
Have a game plan
One good way to remove emotions from investing is to sit down and come up with a good game plan, before it happens. Think about your investing goals and plan ahead of time, when your brain is at its most rational. Map out all the different scenarios and how you might deal with them so that you are fully prepared when they do.
When it comes to market crashes, it can be really detrimental to panic and sell all your stock. To eliminate the headaches and remove the stress, take a moment to understand how the market works and work out your personal risk tolerance level. Take some steps to hedge your risks and to set-up a game plan for the different scenarios.
Patience and planning is key to not panicking, and is just what you need to become a successful investor!