Navigating the Storm: Strategies to Weather the Stock Market Crash and Grow Your Wealth
Experiencing a stock market crash can be a challenging and stressful time for any investor. It is important to remain calm and make rational decisions to protect your investments during such volatile times. If you have invested in mutual funds, here are several steps you can take to weather the storm effectively.
1. Evaluate Your Investment Goals and Risk Tolerance
Before making any decisions, it is important to reassess your investment goals and risk tolerance. If you have a long-term investment horizon and can tolerate volatility, it may be best to hold onto your mutual funds and wait for the market to recover. However, if you have a short-term investment horizon or cannot tolerate the risk, consider reallocating your investments to less volatile assets.
2. Diversify Your Portfolio
Mutual funds provide diversification by holding a variety of stocks or bonds. However, you can further diversify your portfolio by investing in mutual funds with different asset classes and sectors. This can help reduce the impact of a stock market crash on your portfolio.
3. Avoid Panic Selling
During a stock market crash, it can be tempting to sell your mutual funds in order to prevent further losses. However, this is usually a mistake. Selling during a slump might result in irreversible losses and prevent you from gaining from the market’s eventual recovery.
4. Resist the Urge to Sell in a Panic and Make Panic Buys
During market corrections, selling off your investments and making panic buys might seem like a good idea. Negative news such as pandemics, an asset bubble about to burst, or scams being revealed can influence any investor. However, historical data shows that the best and worst-performing days of the stock market are often quite close to one another. During the years 2001-2004, 2005, 2008, and 2018, the gap between the best and worst-performing days of the NIFTY50 was less than one week. Moreover, in 10 out of the 20 years, the gap between the best and worst performance days of the NIFTY50 was less than a month.
5. Keep Your Portfolio Rebalanced
Portfolio rebalancing is a strategy that helps in reducing the overall risk in your investment portfolio, providing better risk-adjusted returns on your investments. This strategy involves buying and selling investments periodically so that the weight of each asset class is maintained according to your targeted allocation. Here are some questions to consider when rebalancing your portfolio:
What am I invested in? Mutual Funds, Stocks, Bonds, Gold, etc. What is the value of my investments? What are my financial goals? What do I focus on when building my investment portfolio - consistent returns, growth of capital, etc.?6. Take Advantage of Tax Laws
The profits generated by selling Mutual Funds or stocks are called Capital Gains, which are subject to Capital Gains taxation rules. A fall in the stock markets can be an ideal opportunity to increase the post-tax returns on your investment by using a technique called tax-loss harvesting. Tax-loss harvesting involves selling your Mutual Funds or stocks at a loss so that you can accumulate a capital loss. This capital loss can then be offset against capital gains from other investments to reduce your tax burden and increase the post-tax returns from your investments.
7. Protect Your Personal Finances
A stock market crash impacts a lot more than just the value of your investment portfolio. Financial markets can also affect employment, the Real Estate Market, consumption of goods, inflation, and much more. Thus, stock market turmoil can have a different impact on different individuals but there are a few things you can do to minimize this impact.
Create a Personal Cashflow Statement: A cash flow statement is a record of all the money that is coming in and going out on a daily basis. By maintaining a personal cash flow statement, you can organize your finances better, ensuring a stock market crash does not impact your ability to take care of essential expenses such as utility bills, rent, tuition fees, etc. Create an Emergency Fund: Another way to protect yourself financially in case of an emergency is to create an emergency fund. If you do not have an emergency fund, start one immediately. Manage Your Debt: As a general rule, a stock market crash is not the best time to take on additional debt. If you do so, you run the risk of becoming caught in a critical economic situation.6. Invest in Equities But Choose Carefully: While Equities are cheaper when stock markets tank, it is essential to be careful when making these investments. One way to benefit from the lower cost of Equities is to change the allocation in long-term investments such as National Pension System (NPS) and Unit Linked Insurance Plans (ULIPs). Both NPS and ULIPs are long-term investments with multi-year lock-in periods.
Bottom Line
A stock market crash offers investors a unique opportunity to grow their wealth. But to take advantage of this crash, you must have a plan in place before the crash happens. The 7 strategies discussed above are designed to help you not only weather a market crash better but also make sure that you can grow your wealth significantly when markets recover at a later date. I hope this helps.
Mandatory Disclaimer: As required by SEBI, refer to your financial consultant for advice before investing. This group is only for educational and learning purposes. If you are looking for some great and disciplined trading knowledge, you can join one of the best stock trading channels on Telegram: JackpotTradeX.
Happy Investing!