When stock markets crash, most investors feel a sense of panic. There’s nothing remotely comforting about seeing your stocks falling more than 10% in a single day. We humans are, by our very nature, loss-averse.
The first thought that may come to mind, especially for inexperienced investors, is to start selling stocks. But history has shown us that doing this can be disastrous. We should be buying stocks at market lows and selling them at market highs (or better still, holding them and banking lots of juicy dividends), not the other way round.
In the heat of the moment it can be hard to remember this, so here are three things we should all be doing, to make sure we don’t overreact in a market crash.
1. Turn off the news
In times like these, it’s tempting to follow the news so closely, that we are tracking every single update. This only adds to our panic. We become completely engulfed in the crisis and lose the ability to think rationally.
If you find yourself doing this, make a wholehearted effort to focus on something else. It could be sport, a book, or a favourite TV show. It’s important to change the narrative, so that the crisis is not the only thing we are thinking about. The more we are consumed by the crisis, the more likely we are to sell all our investments, which is what we want to avoid doing.
2. Reaffirm your investment values
Whenever the stock market crashes, there is a tendency to think that this time is different, that the stock market won’t recover. We automatically imagine a doomsday scenario.
When this happens, we should re-examine the investment logic and theory that tells us not to sell during a stock market crash. This will help us to feel more confident about deciding not to sell. Read investment books and watch videos, see what Warren Buffett has to say about it. This will put our minds at ease and hopefully stop us from worrying.
Remember that we are investing for the long term. For those of us with investment horizons that stretch beyond a couple of years, there is plenty of time for share prices to recover.
3. Think more broadly
If you are still thinking that this time is different, ask yourself why. The human race has suffered from viruses and pandemics before. Why is this one going to be so different to the others? The stock market recovered from previous episodes, why will it not recover from this?
Think about all the past times when we thought that a particular crisis or event was the worst thing that could ever happen. Was it really? Think back to other crises – September 11 2001, SARS, the financial crisis, the dotcom boom (and bust). There are too many to mention, but the point is that the world continued after them. Capitalism and stock markets continued. Thinking more broadly allows us to stop thinking so narrowly about this one event and put it into perspective.
If we do all of these things, we will be able to look at the current events through a rational lens. The ultimate goal is to be able to see things so clearly that we can view this stock market crash as a buying opportunity, which is what I believe it is.