The stock market is a common window where frequent buying and selling of shares of publicly held companies take place. Investors find shares as a potential area to invest and to receive benefits. The possibility of gaining profits is very high with shares when compared to other investment options available. Shares also carry a high level of risk associated with it. There is every chance you can lose all your investment. Hence, an investor has to think wisely before investing in the stock market.
The recent global pandemic also has an impact on the stock market. The panic prevailing among investors has resulted in a large scale sale of stocks. This has also paved the way for an unpredictable fall in the market. If you are a frequent investor in the stock market and worried about how to face a crisis market crash situation, then here are a few tips. With this knowledge, you can escape the market crash and protect your investments.
What is the bear market?
There are two major terms describing market trends. They are the bull market and bear market. The bull market is a condition, where the prices of shares rise, which encourages investors to buy more shares. Bear market describes a market condition wherein the market experiences a prolonged decline in price. The price of investment falls at least 20 percent or more. Bear markets can be cyclic or can extend over a long period. The cyclic type lasts from few weeks to few months. The long term bear market can last for several years or even a few decades. The most recent occurrence of a long term bear market lasted for about 17 months in the united states, between 2007 and 2009.
In simple terms, if the market trend goes up, it is called a bull market. If the market trend falls, then it is termed as a bear market.
Making the most of bear market
According to most investors, the bear market is a bad sign. Most investors sell their stocks and try to evade the situation. ultimately, the prices of all the drops. An investor with the right mind would make use of this opportunity to buy stocks that are priced low. Once after the crisis, when the market trend goes up, these shares would fetch a higher price. Do not panic when the prices go down. Look for companies that have the potential to perform well. Continue to buy shares and avoid the selling of shares when prices fall. All you have to do is buy shares and continue to wait until the market gains stability.
Stock market = calculated risk
The stock market is considered risky in the first place mainly because of its dynamic nature. Shares that are priced high today, may drop down tomorrow. This unpredictable nature of the stock market is what investors fear. But if peered deeper, stock market trends can be predicted. Not on a day to day basis, but over a long period. Investors who know to analyze and predict the trend of the stock market tend to succeed more. Remember that stock markets are more profitable as long term investments rather than short term returns. When an investor calculates the possible outcomes before investing, he has a very high chance of making a profit. This is why stock markets are termed as calculated risks.
Stick to your plan
One mistake that people tend to commit mostly in the stock market is the sale of shares under panic. When the market crashes and the value of your shares go way below the safe limit, investors tend to sell away their shares. This is mainly to escape the loss. Remember, “Patience always pays off.” You have to wait if you wish to enjoy the benefits you calculated. It is indeed terrifying to see your share’s price falling. Stay as planned even in times of crisis. Remember to escape the herd mentality that most investors possess. Following the crowd and selling off your shares is not always the right decision to make.
Here are a few strategies you can follow in a bear market to get benefitted
- 401(k) is a standard retirement plan that most investors tend to follow. Maximize your 401(k) plan and wait for the market to stabilize again. This might even take a few years. But in the end, when the market trends move up, you will receive bumper returns.
2. Analyzing past bear markets can also fetch you valuable details. Identify shares that increase in value in a bear market. Buying these shares will maintain your stability even during a downfall.
3. You can also retire on alternatives. For example, some stocks pay regularly, i.e., dividends. Investing in such shares will continue to generate profit even under market crashed conditions. The dividend type of shares continues to pay the investor regularly even in a bear market if the company continues to make a profit. Identify and allocate a part of your investment in such shares.
4. A bear market is synonymous with a crisis. Under such a crisis, there is financial instability. Companies search for economic support. You can make use of this to buy bonds. Bonds are less risky means of investing when compared to stock markets. Bonds simply can be termed as lending money to governments or firms or agencies, which they repay after a while along with the interest. Bonds can be made use of in a bear market to gain maximum benefits.
5. If you are still panicked about surviving the bear market, all you have to do is stay still. No more buying or selling. Just wait for the crisis to get over and the markets to return to the regular state. Deciding to sell off shares in times of distress is not advisable.
Mistakes people tend to do in a bear market
Once the crisis has begun, all investors hustle to withdraw themselves by selling off their shares. The first thing they do is, listen to an expert. remember, no expert can predict the market perfectly. There is every chance that the prediction might go wrong. Do not always seek expert advice. The best way is to stop predicting the future market. As mentioned earlier, the stock market cannot be predicted on a day to day basis. You will only end up distressed if you are trying to predict it.
What happens in the market today or tomorrow doesn’t have n impact on the profit, that you wish to withdraw after two decades. Hence if you are a long term investor avoid a frequent check on the market condition. This is true in the case of a bear market. If your retirement period is after a decade and you sell your shares fearing the bear market today, you will only end up in a catastrophe.
Always have a Plan B
Having a backup or a simple saving can help you manage the stress during a market crash. This emergency back up will serve you right when you need it the most. Try to include this emergency fund as a part of your investment plan to protect your saving. Diversification of funds is also one another way to avoid losses due to market crash.