Are you looking for a long-term investment? Do you want inflation-beating returns over the long run? You may consider investing in stocks if you are an aggressive investor. However, your stock investment is affected by market fluctuations, and you could lose money during a stock market correction. Let’s look at some tips to survive a stock market crash.
What is a stock market crash?
You have a stock market correction as a gradual decline in the market indices such as Nifty or Sensex by at least 10% from its 52-week high. Moreover, you may have multiple stock market corrections in a year. You may find the stock market slowly correcting over days, weeks or months.
The stock market crash is a sudden fall in the market indices by around 10% in a day. You may suffer significant losses if you sell your stocks during a stock market crash.
You may find the stock market crashing once every five or seven years. Moreover, stock markets usually crash after moving upwards for a long time. You have stock markets crashing during a major natural disaster or a severe financial crisis.
How to survive a stock market crash?
You must stay in control of your emotions during a stock market crash and avoid following the herd. For instance, many novice investors sell stocks of companies with solid fundamentals during a stock market crash. You must buy stocks of companies with solid fundamentals as they are available at a lower price during a stock market crash or correction.
You must have cash in hand to purchase good quality stocks when markets crash. For example, many investors have lost opportunities to capitalise on stock market crashes or corrections because of a shortage of ready funds.
You must buy stocks of companies that have an economic moat during a stock market crash. It is similar to a canal or ditch around a castle, protecting it from an enemy attack. For instance, stocks of companies with an economic moat may have strong cash flows and can easily withstand the competition in the industry.
You must invest in stocks of companies with higher revenue and profits over peers and rivals over time. Moreover, these companies may enjoy an economic moat which translates to a higher market share. You could look at companies that produce goods and services at a lower cost, build complex products, or enjoy brand value to identify an economic moat.
You might have suffered heavy losses if you sold stocks of fundamentally solid companies during a previous stock market correction. However, you could learn from your mistakes and avoid selling your winners during the subsequent stock market correction. You must buy shares of a company only after your research and hold on to your winners for the long term.
To survive a stock market crash, you have to diversify your portfolio across equity, fixed income instruments, and gold. It helps you navigate market volatility and enhances the risk-adjusted returns in your portfolio. Experts recommend allocating at least 5%-10% of your portfolio towards gold.
Stock market corrections and crashes rarely impact long term investors in stocks. Moreover, you may view a stock market crash as an excellent opportunity to buy the stocks of fundamentally solid firms. You must have ready cash to buy good shares at a lower price during a stock market correction. In a nutshell, you must invest in stocks to achieve your financial goals only if you have a higher risk appetite and can stay in control of your emotions.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
