Stock market crashes are inevitable, and they can really do some damage to investors’ portfolios.
On the bright side, a market crash offers specific opportunities that could increase investors’ gains. Market history has shown that investors make most of their money during bear markets or when the market sells off above 20%.
If you know the right strategies to make the most out of a market crash, you can turn such a concerning situation into one that is manageable and beneficial.
Here are a few investment moves you can make to use a stock market crash to your advantage.
Practice Dollar-Cost Averaging
Choosing to dollar-cost average your investments is the safest strategy you can do when the stock market is taking a rapid dive. By dollar-cost averaging, investors even out the ups and downs of their purchase prices, usually making them lower in the long run.
Spreading your purchases that way helps minimize the risk since you’re not putting all your investment dollars into the market when it hits a certain price point. That should also help ease your worry over a stock falling significantly the next day.
Dollar-cost averaging is automatic when you invest through a workplace retirement plan. But suppose you’re investing via a tax-advantaged individual retirement account (IRA) or a taxable investment account. In that case, you need to check with your broker if they can make your contributions automatic.
Buy Discounted Stocks and Funds
Significant market declines can compel some investors to sell their holdings, particularly those who borrowed money to bet on stocks and are now facing margin calls. Remember, the goal of investing is to buy low and sell high.
While a stock market crash is a pretty scary situation, it opens the door to the opportunity of buying quality stocks and funds at more affordable prices. For beginner investors, index funds are good options during such a situation. You can purchase them steadily and regularly and get the sleep you need.
Additionally, if you automated your investments by contributing a fixed amount each month, you continue to buy low and sell high even when the market drops. So if stock prices stumble, you receive more shares for your money. But if the prices climb, your shares turn a profit.
Invest from One Sector to Another
Sector rotation is an excellent strategy you can use to counter a major market slump. Sector rotation involves strategically moving from one stock market sector to another to avoid potentially huge drops in a particular sector.
For example, tech stocks appear to perform well when the economy sees substantial growth. On the other hand, when the economy loses momentum, utility stocks and other stocks that are seen as uninteresting often do better.
However, note that sector rotation requires knowing an excellent time to enter and exit the market. And even if you got in at the right time, determining the time to leave can be a challenge. Fortunately, diversified index funds can help you avoid that and keep the stability of your returns.
Diversified index funds have the potential to perform well, regardless of whether a particular sector is surging or falling. So if you’re holding all the market in the first place, you’re already set to financially benefit from any of its sectors’ gains., which could support the other sectors tumbling in the short term.
Reduce Your Losses
Sometimes, reducing your losses is the best investment strategy you can do.
Minimizing your losses not only allows you to set aside money that you can invest for later. It can also let you practice tax-loss harvesting, an investing technique that lets you claim tax losses when you’re investing in a taxable account.
By claiming your losses on your taxes, you offset income with the losses you incur, which may cut your tax bill.
Before you make such a move, consult with a tax expert to avoid performing a wash sale, which occurs when you sell an asset at a loss and then buy that same asset or another that is very similar to the one you sold at a loss.
You can also use an expert advisor (EA) to take care of the investments on your behalf. Remember that some EAs, especially the best ones, are already equipped with tax-loss harvesting capabilities.
Opt for Bonds
Market crashes also provide an opportunity to invest in bonds. Government bonds are usually safe investments, although they generate fewer returns than stocks and other types of bonds.
Still, considering government bonds’ solid repayment history, having some government bonds in your portfolio can give you some peace of mind during a down market.
Investors typically need to buy government bonds from brokers, which can be expensive and difficult for most individual investors. While that is the case, many investment and retirement accounts offer bond funds that have a lot of government bond denominations.
However, not all bond funds contain government bonds. Some can have corporate bonds, which carry more risks than government bonds.
Invest Carefully If You’re Close to Retiring
Investors close to retiring have something to be concerned about during a stock market crash. Tapping into your retirement savings during uncertain market situations is not beneficial, after all.
But if you have carefully prepared for your retirement, you can have better odds of surviving the worst effects and fears of a market slump.
Keep in mind that while you have an aggressive start with your retirement saving, you’re, as much as possible, switching to safer, bond-based investments to keep your savings safe as you get older.
You may even use the bucket strategy, which sets asides a few years of your living expenses in cash, to maintain your lifestyle and shield it from tough times in the markets, such as a crash.
Having that kind of safety net to keep some of your money invested puts you in a position where you can take advantage of a rebound or an increase in the market. Such a thing can be crucial for long-term investors, including those already retired.