By Ruben Hakopian
There are several black dates in the history of stock market: 1634-1637 in Holland, 1929 Great Depression in the U.S., the Asian Crisis, which actually lasts until now, and more. Economists spare no effort to keep an eye on the market performance and estimate whether or not another crash is going to occur. Yet, market is nothing like the weather and anticipations can change drastically.
Market crashes are scary; they happen all of a sudden and can involve real estate, bonds, businesses, currencies, etc. Timing the market and, as we have already figured out, trying to predict the next crash is not an easy task, perhaps even impossible. Each and every investor bears stock crash in mind, while forming a portfolio․
If you’re expecting that this article is going to reveal a brand new strategy that gives you a 100% guarantee that you will avoid market crash then you are going to be deeply disappointed. There are no certain rules or strategies that can prevent investors from facing stock market crashes and not experience any losses. But, on the other hand, there are some preparatory steps that can at least ensure some safety and risk minimization for investors. And this article is going to discuss five of these applicable steps, so let’s jump into discussing them.
1. Have Sufficient Information about the Investment
Think of market crashes like earthquakes. One of the steps to reduce the damage of the earthquake is having an evacuation plan. Each building has to have one and when planning it, the building crew takes into consideration every small detail: walls, corridors, material, doors, windows, etc. A carefully designed evacuation plan can save lives, and the more information there is, the more accurate the plan will be.
The same logic applies to the stock market. During a market crash, the investor needs to know everything about the investment. Reports of assets and accounts have to be clear and precise, so that investors can track them. This is absolutely necessary not only during the stock market crash, but also in general. It is just like quickly grabbing the money and jewelry during emergency situations. If the homeowner does not remember where his belongings are, then there is a good chance he will not have enough time to find and take the valuable items․
2. Conduct a Risk and Loss Assessment
Investment is a great way of generating income, but it comes with risks. And again, let’s get back to our earthquake example. Say you want to build a business in an area that is prone to frequent earthquakes. What do you do first? Risk assessment, of course, with professionals. And based on the conclusion, you decide what kind of building material you should get or where the main walls should be.
Similarly, everyone interested in investing has to do risk assessment first. What does it mean? Well, potential investors realize that at some point, they will face market downs. And if this happens, how much they are ready to lose. The number varies and it depends on factors like age, future plans, investing goals, time and so on. Market crash is also a risk, a big one, thus, careful risk assessment is a part of the preparations.
3. Diversify
If you have been interested in investing then you definitely have heard of this term before like hundred times already. We can’t have enough of this term because diversification is the darling of investors. Not all types of stocks are affected by stock market crash. Stocks respond to ups and downs differently. That is why the number one risk minimization strategy is diversification.
Owning a wide variety of stocks from different sectors and industries can be the best way to prepare for a market downturn. Ironically, diversification has risks, a risk to be precise, as well — over diversification․ It is not a complicated complex that will baffle the investors. So, while diversifying, investors should keep an eye on that too.
4. Include Defensive Industries
This is my most favorite and most sustainable response to market crashes. If you’re a rookie in investment then bare with me because there are some terms coming up on your way. For this step, we are continuing the concept of diversification, buying stocks from defensive industries, or the so-called non-cyclical stocks can provide assistance, too. What on Earth are non-cyclical stocks? It is very simple, non-cyclical stocks are not closely connected to economy, so their rise and falls, including market crash, will not harm the investor. Convenient, right? Including such stocks in portfolio means that in case of a crash, at least some of the stocks will perform well.
5. Plan a Crash-Related Q&A
No one can give you a better insight than a professional in the field. It is good that you’re reading articles, but a real face-to-face conversation is more effective. So, my suggestion is to have a Q&A session with an investment advisor beforehand. They know a lot more about the past crashes, the current market status and if anyone has a shot in predicting how market might act, it is them.
Before committing to any deals, investors should ask all the questions concerning market downturn and share their concerns with advisors. This will at least prepare you somewhat and give you general ideas about those “emergency” situations.
Yes, investing does include risk, but look at the other side of the coin: there are rewards, too. Instead of refusing to invest because of the slight possibility of market crash, as a potential investor, you can spend some time understanding market downturn and how you can prepare for it. And by the way, timing the market and selling the stocks because there were some strange changes is not the correct approach.
Read over this article one more time and highlight the points that you think you can imply to your decision making process. Last piece of advice — stay updated and you’ll be ready to embrace all kinds of challenges.
