Investors are well aware that one upward trend does not follow the next on the international financial markets. But not every broad price drop on the market has to drag your own portfolio deep into the red. This means investors can get through market crashes largely unscathed.
• Stock market crashes happen all the time
• Losses can be cushioned with preventive measures
• Investing is worthwhile even in the midst of a crash
Over the past few decades there have been repeated widespread market slumps. Although protracted bear markets have sometimes caused enormous losses of investor assets, a full-blown stock market crash is often the result of a specific event and therefore largely comes as a surprise to many investors. Such major market collapses occurred around 1929, when the global economic crisis left its mark on the financial market. In 1987 there was a panic reaction in the market after the failure of computer systems increased negative market sentiment. The dot-com bubble burst in 2000, and eight years later the market collapsed massively due to the real estate and subprime mortgage crisis. The last major stock market crash for the time being came in 2020, when the COVID-19 pandemic paralyzed life worldwide and left deep marks on the stock markets.
The consequences of crashes can be contained
None of these stock market crashes were avoidable for investors, but not every investor suffered equally from the market price declines. Those who had hardly any tech stocks in their portfolio in 2000 got off more lightly, because those who had a broad position in 2020 were able to compensate for some of the broad market losses with other investments.
In fact, there are a number of measures that investors can take to at least limit the consequences of a market crash on their own assets.
Know your own portfolio
It is important to know about your own portfolio and to always critically question your own goals. When making specific stock investments, investors should keep an eye on the previous (long-term) success of the shares. If you know how portfolio stocks have performed in the past, it will be easier to decide in the event of a crash whether to sell a particular stock after a market crash or to rely on the share’s long-term recovery qualities. Good long-term investments that have proven themselves in recent years have apparently had a solid business model – if nothing has changed, this fact can protect investors from short-circuit reactions.
In addition, your own goals should always be questioned, because they naturally change over time. If you want to build up assets for retirement, you have to make your portfolio riskier than someone who has already reached retirement age. However, if you have more time to achieve your goals, you can also invest in a more risky way and compensate for a possible market crash over time.
So it’s worth knowing your own portfolio well and also being aware of which risks you’re willing to take and which you’d rather avoid.
Diversification is key
Inextricably linked to this is a broad range of your own portfolio. Investors who, in addition to pure stock investments, also cover other segments of the stock market world can benefit from this diversification in the event of a crash. Anyone who is invested broadly and holds part of their assets in bonds or other asset classes that traditionally do not necessarily correlate with the stock market can significantly reduce their investment risk and cushion at least some of the losses in the event of a stock market collapse.
In any case, investors should only have those stocks in their portfolio that they are absolutely convinced of. Anyone who invests in companies that have operational problems must be aware of the risk that, in the event of a stock market crash, these stocks will not necessarily fall lower than operationally healthy companies, but these problematic stocks will probably have difficulty recovering in the long term.
Keep an eye on liabilities
If you want to survive crashes largely unscathed, you should also keep an eye on your finances away from the stock market. If you have a high level of debt, it is worth partially liquidating your investments before a market crash occurs. Real estate loans or mortgages should also remain at a manageable level so that you do not have additional large monthly financial obligations in the event of a market downturn.
Benefit even in times of crisis
While the first steps are considered preventive measures against a possible stock market crash, investors can also take measures in the midst of a broad market downturn to cushion the price loss in their portfolios. This means that even after a crash has started, investors can still switch to investments that traditionally counteract the market, such as bonds. Betting on falling prices is also an option to offset losses, but this requires a certain willingness to take risks on the part of the investor.
In addition, price drops can also be worthwhile for those investors who have fundamental trust in their portfolio – they can then use the price drops to buy more: Buy the dip is the name of this tactical trading strategy. However, this tactic becomes problematic in the event of a significant market crash, when it is largely unclear how low the investments will sink.
To invest in the midst of a stock market crash, investors should keep a certain amount of cash on hand. Because in the midst of difficult market phases, the recovery potential and therefore the return is significantly greater – at least if you rely on the right stock market stocks.
Stock market crashes cannot be prevented
In principle, stock market crashes cannot be prevented. Anyone who invests in the financial market will be affected in one way or another by the consequences in the event of a collapse. But if you are long-term oriented and have carefully thought about and adjusted your investment selection, you can weather stock market storms.
Editorial team finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.