What to do when the stock market is crashing

First things first. DO NOT PANIC!

When stocks are falling and the value of people's portfolios is plummeting, panic selling is a common reaction. As a result, it's critical to understand your risk tolerance and how price fluctuations—or volatility—may affect you ahead of time. Hedging your portfolio through diversification—holding a variety of investments, including some that have a low degree of connection with the stock market—is another way to reduce market risk.

It is understandable to think whether or not it is the best choice to pull your money out of the stock market amid a current crash, and the value of your portfolio plummets. It may seem like the reasonable thing to do but probably not the best option.

The most recent stock market crisis occurred in early 2020, with the emergence of the COVID-19 pandemic which remains a major source of market volatility. However, the current market crash is beyond the pandemic. Market downturns are common and can be triggered by a variety of circumstances. In early 2022, markets were down not only due to pandemic fears, but also due to concerns about rising inflation and interest rates.

Based on the history of the stock market we can tell how long crashes, corrections, and bear markets have lasted, but there is no telling how long and severe future declines may turn out. For example, the S&P 500 stock index fluctuates between -1%and 1%, anything outside of these parameters may be deemed an active day on the stock market. Trading may be paused for 15 minutes if the S&P 500 declines 7% in a single day which has only happened a few times in the history of the market, and it represents a bad day for Wall Street.  

Long-term investors understand that the market and economy will eventually revive, and they should be prepared for it. The stock market fell during the 2008 financial crisis, and many investors lost their assets. The market, on the other hand, bottomed out in March 2009 and finally rebounded to its previous highs and beyond. Panic sellers may have missed out on the market's surge, but long-term investors who stayed in the market rebounded and did better over time.

So, here are 4 ways you can survive a market crash:

1.     Know your risk tolerance: Your risk tolerance is determined by a variety of factors, including your investment time horizon, monetary needs, and emotional reaction to losses. It is important to thoroughly research the stock market and have a record of the strengths, flaws, and purpose of each investment in your portfolio. Your findings will serve as a concrete reminder of the characteristics that make a stock worthwhile to hold. A rapid fall in the value of an investor's portfolio is disturbing to say the least for inexperienced investors. That is why it is critical to determine your risk tolerance before you begin building your portfolio, rather than when the market is in the midst of a sell-off.

2.     Diversify your portfolio: Diversification, or spreading your money over a variety of investments, is critical for lowering investment risk and surfing safely through a volatile market. Diversifying your investments ensures that they aren't all invested in one place. As a result, if one stock or industry has a bad day, your other assets may be able to compensate for the losses. Downside risk can be mitigated to a degree by diversifying your portfolio and employing other investments like real estate, which have a low correlation to equities. Diversification is defined as allocating a portion of your portfolio to stocks, bonds, cash, and alternative assets. Every investor's situation is unique, and how you divide your portfolio is determined by factors such as risk tolerance, time horizon, and goals. You may avoid the risks of putting all your eggs in one basket if you use a well-thought-out asset allocation strategy.

3.     Prepare for possible losses: You must understand how the stock market operates in order to invest with clarity. This helps you to study unanticipated downturns and decide if you should sell or buy more stocks. Mostly, be prepared for the worst-case scenario and have a working strategy in place to mitigate your losses. If the market crashes, investing in only equities could result in a large loss of capital. Investors intentionally make other investments to diversify their portfolio and reduce risk in order to hedge against losses.

4.     Focus on the long-term: Despite the fact that stock market returns can be extremely unpredictable in the short term, they beat practically every other asset class in the long run. Even the biggest declines appear to be minor glitches in the market's long-term upward trend when seen over a suitably extended period of time. This is especially important to remember amid volatile periods when the market is on the downturn. Having a long-term perspective will help you to see a major market crash as an opportunity to build wealth, rather than a threat to clean out your investment. Usually, in major bear markets, investors sell stocks regardless of quality, creating an opportunity to buy certain blue chips at reasonable prices and valuations.

Why should I invest?

Investing helps you protect your retirement, make the most of your money, and expand your wealth through the power of compounding. According to a Gallup poll conducted in July 2021, 44 percent of Americans do not invest in the stock market due to a lack of confidence in the market as a result of the 2008 financial crisis and the recent market volatility. Also, those who don't have enough funds to get by month to month don't have money to invest in the stock market.

According to Gallup, from 2001 to 2008, an average of 62 percent of U.S. adults indicated they owned stock, a number that has never been surpassed since. A stock market drop, whether caused by a recession or an exogenous event like as the COVID-19 pandemic, can put basic investing principles to the test. It's crucial to remember that the stock market is cyclical, and that stocks will inevitably fall in value. However, a dip is only brief. Instead of panic selling when stock prices are at all-time lows, it's better to look long-term.