What To Do When The Stock Market Crashes?

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With the recent events, you may have noticed that the Dow Jones Industrial Average and other popular stock market averages have been hit hard. Some of the drops have exceeded over 1000 points, and for many of us, it comes as a hard shock to the system.

With the Coronavirus scare, you’re seeing extreme volatility in the markets. In fact, the wild swings and downward movements make you question your involvement in the financial markets in the first place.

So what do you do in situations like this one?

Buy More Shares

It may sound counterintuitive, but buying more shares when people are selling could be a smart move. Your increased contributions or purchases allow you to purchase at a lower price. By continuing to buy at a lower price periodically, it means your overall average of the prices you bought throughout your holdings becomes lower (lower cost basis).

Increase Your Retirement Contributions

Because IRAs and 401(k)’s are intended for the long run, chances are is that you’re invested in stocks since this type of asset produces the best long term results. Because of this type of investment, you are likely to be exposed to the stock market and ultimately the wild ups and downs.

Retirement accounts require some level of participation and management. Even if you’re not an expert in personal finance, you will need to determine the level of risk tolerance and allocate your account accordingly.

If you are a retirement participant, this could be a good opportunity to buy at incredible low prices. You can contact your 401(k) or non-profit company and request to increase your contributions by a percentage. Note that most 401(k) or retirement companies allow you to do this on a website.

This has a profound effect on your overall retirement strategy. You are buying periodically on a weekly, bi-weekly, or monthly basis. Though you may not always purchase at a low price, the average price that you bought in is lower. This means that your portfolio has a lot of room to grow once the market recovers.

In other words, the lower overall cost basis gives you a lot more room to grow and increase your wealth.

For IRAs, however, you may need to manually make contributions. Start contributing more during the downturn through your retirement account’s trading platform.

Retail Accounts

Retail accounts are non-retirement accounts that are taxable. Unlike retirement accounts, you buy shares without dollar limits and get taxed when you sell shares in your account.

Buying more shares is simple. You can log in to your brokerage or mutual fund company’s website and purchase more shares. The key here, again, is to lower your cost basis. Each purchase will lower the average price of your stock/fund, leaving you with greater potential for growth.

Keep in mind that you should spread out your purchases over a longer period of time. Don’t contribute all of your money in one purchase.

Change Your Investment Mix

In personal finance, your money can be tied up in various types of asset classes. Popular investment types include stock, bonds, and cash reserves.

Investors who are concerned about the long term effects of the downturn may want to consider shifting some of their assets to safer asset classes like bonds and cash reserves. Cash reserves like money markets and CDs can give you a sense of safety. And more importantly, you know the cash you have in hand won’t be lost to the market fluctuations. Bonds too can provide some level stability, depending on the quality of the bonds.

On the other hand, if your risk tolerance is higher and if you have a penchant to seek high gains, consider reallocating your safer investments like money markets to stocks. Your new aggressive mix might get you in a better position for higher returns.

Sell Your Stock and Stock Fund positions

If you’re uncomfortable with the entire market or worried about long term sellout, consider selling all of the assets and storing in cash funds like a money market. The goal here is that you wait out for the bear market to end and eventually enter back into the market when things settle.

You may miss out on new lows, but you have the comfort of knowing that your account can’t down any further.

Final Thoughts

Economic and market crashes can come at the most inopportune time. Think about what’s best for you and your family in making the best decision. By changing your investment mix or adding money, you can readjust your investment strategy to weather the financial ups and downs.

Disclaimer

As we try to provide the best possible, accurate information, we are not personal advisors. We recommend that you seek professional advice if you want additional advice on your money matters.