Smart Investments During A Stock Market Crash
It's no secret that the stock market is volatile. One day it can pump upwards, and the next, it could plummet. Volatility is a normal part of the stock market. The cost of long-term portfolio gains is dealing with short-term volatility.
But it’s essential to have a plan in place when the stock market crashes so that you can survive anything the stock market throws at you.
You don’t want to be the person that is forced to sell your stocks at all-time low prices to deal with unexpected emergencies.
Smart Investments During A Stock Market Crash
If you're nervous about the stock market and want to protect your portfolio, you should consider diversifying your investments.
Diversification is a strategy for spreading your money across different asset classes, such as stocks, real estate, commodities, or bonds.
The idea is that if one asset class you are investing in crashes, it doesn't have as big of an impact on your overall portfolio.
Avoid Speculative Investments
You should also keep in mind that when the economy is doing well, people tend to follow each other like sheep and make similar investments at the same time—which means everyone is buying the same thing at once.
This herd mentality can lead investors to make bad decisions because they follow what everyone else does rather than using their own judgment based on research or knowledge of their specific situation.
Speculative assets tend to get hit the hardest on the way down. Avoiding herd behavior will help protect your investments during a downturn.
What Goes Up When The Stock Market Crashes?
There are a few different types of assets that generally perform well during times of economic uncertainty.
Gold & Silver
In a bad recession, people may start to doubt the overall financial system. This could motivate people to turn to historic “safe havens” such as gold or silver to hedge against the modern financial system.
If you’re unfamiliar with the term, “safe haven” refers to an asset that maintains its value as volatility in other markets (such as the stock market) increases.
Gold is a rare and stable commodity on earth—it has an extremely long history of retaining its value over time, making it resistant to inflation.
Gold has always played an important role in the financial system. Gold coins were first used in Lydia (an area now part of Turkey) around 550 BC.
Up until 1971, the U.S. dollar was backed by gold. Dollars could be exchanged for a fixed amount of gold at any time. But that all changed due to the Bretton Woods agreement in 1971.
Here’s a chart from GoldSilver showing the performance of gold and silver during the biggest stock market crashes.
In addition to gold and silver, other types of assets can help protect your portfolio against economic downturns:
Inverse ETFs
Inverse ETFs—also known as shorting ETFs—are designed to make money when the overall market falls. These ETFs allow investors to bet against the stock market. And they can be a valuable tool for hedging your portfolio against losses in a volatile market.
This type of investment isn’t necessarily right for everyone since it involves taking significant risks. However, suppose you're nervous about how much damage might happen once we hit another recession. In that case, Inverse ETFs might be worth looking into to hedge your portfolio from a further stock market decline.
One of the most significant downsides to shorting ETFs is the fact that you are betting against the stock market. This means that if the market goes up, you will lose money.
Another downside to shorting ETFs is that you will usually have to pay higher fees. Shorting ETFs use complex derivative strategies in the backend to make shorting possible. It’s not uncommon for shorting ETFs to have expense fees of 1% or more.
You can read more about shorting ETFs in my other blog post here.
Cash
Holding cash is also popular among investors who want some buffer against market drops. Having cash during a recession will allow you to take advantage of any investment opportunities that arise. Especially if panic becomes widespread.
When most people start selling their assets in exchange for cash, this strengthens the purchasing power of cash.
For example, during the 2008 recession, many real estate investors were able to purchase properties at a fraction of their previous value. Cash allowed them to take advantage of this opportunity and profit significantly.
However, unlike many other asset classes, cash doesn’t offer any returns. It even loses purchasing value due to inflation, so holding cash over long periods is not a good idea.
Image Source: Visual Capitalist
Good Investments To Make During A Stock Market Crash
Investing In Stocks
The best time to buy stocks is when they are on sale. The stock market is the only place people run away from when things are on sale. If you have a stable job, a solid emergency fund, are holding great stocks/funds, and are a long way from retirement... you should not touch your portfolio unless you're going back to buy more.
Some of the biggest portfolio gains come from continuing to buy stocks in bear markets.
Investing in a bear market looks stupid… until it turns into a bull market.
Investing In Real Estate
The easiest way to invest in real estate is by buying a property that you can rent out or sell later at a higher price. If you can buy real estate when the market is low, over time, your investment will likely grow in value. Someone will always need a place to live. Making real estate a great long-term investment.
You can also take advantage of this by investing in a REIT (Real Estate Investment Trust), which is a company that owns multiple properties and rents them out. This is great for investors who want diversity and don't have the time or desire to manage their own properties.
Investing In Yourself
Investing in yourself is the best way to protect against economic uncertainty. By developing a valuable skill, you can insulate yourself from inflation, deflation, or recessions. No matter what the economy is doing, you'll always have the ability to generate income.
This makes you far more resilient than someone who only has a job or savings. When economic conditions are tough, companies lay off workers and cut costs. But if you're self-employed or have a valuable skill, you're much more likely to weather the storm. Investing in yourself is the smartest thing you can do to prepare for an uncertain future.
Crashes Are Normal: Don’t Panic!
The stock market cycle is a journey, not a destination. When the markets are up, you shouldn’t be investing as if they will keep rising forever.
When they’re down, you shouldn’t invest as if they will keep falling forever.
And when they're sideways or flat? That's when you want to take advantage of your patience and invest in those stocks that have been getting less attention because everyone seems too busy talking about which way the stock market will go next.
It's important not to panic during a downturn—just because your investments aren't doing what people thought they would doesn't mean it's time for them (or you!) to give up on making money altogether.
Another bear market tip: Stop checking your portfolio balance daily. The balance you see is the *CURRENT* cumulative value of all of the assets you own. It's not set in stone until you hit that sell button. Pay more attention to the number of assets you own rather than your daily balance.
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Want to keep learning? Check out some of my other blog posts:
As Always: Buy things that pay you to own them.
-Josh
Blog Post: #057
