Investors have been worried for months about the increased stock market volatility during these uncertain times, and the recent market sell-off likely hasn't done much to assuage their fears. The good news is that you don't have to simply sit back and worry about a stock market crash. There are three things to do in case it happens, and one key thing you'll definitely want to avoid.
Do these three things in case of another stock market crash
If you see the share price of your stocks begin to fall, or if you're worried about that happening soon, here are the three steps you'll want to take immediately:
- Review your asset allocation: Many investors allowed themselves to become over-invested in stocks during the 2010s because they didn't rebalance their portfolios, or because they were enjoying their gains too much during a decade of low volatility and failed to remember that darker days could come. But recent market activity serves as a stark reminder of why you need to be exposed to an appropriate level of risk. If you've got too much of your money in stocks based on your investment timeline, take the time now to fix the problem. And remember, if you'll need the money within two to five years, it should not be in the market, as you might not have time to wait out any downturn.
- Determine if you're happy with your investment strategy: Warren Buffett famously said that "It's only when the tide goes out that you learn who has been swimming naked," which essentially means anyone can do well when everything is going well, but troubled times reveal weaknesses. Those times may soon be upon us, so it's imperative you're confident in the investments you've made as well as your process for choosing them. If you've got a sound investment thesis, not only is it more likely your stocks won't suffer as much during a recession, but you're also less likely to panic sell when the going gets rough.
- Stop worrying: If you've checked the top two items off your list, then you don't need to worry about another stock market crash. It may happen and your investments may suffer some short-term losses, but you'll be fine in the end.
And avoid doing this one thing
The actions you take play a large role in determining whether you're a successful investor -- but the actions you don't take may play an even bigger one.
Recent research revealed that around one-third of investors check their portfolios every day, and many increase the frequency of these check-ins during turbulent times. While it may seem smart to keep a close eye on how your stocks are performing, the reality is that this is often exactly the wrong move. It's problematic because obsessing about the day-to-day performance of your investments leaves you prone to big mistakes such as losing sight of the big picture and focusing too much on short-term movements in share price, trading more often than you should, selling before you realize all of the potential profits you could earn, or selling at a loss if you panic at the first sign of trouble.
The reality is, those who buy and hold their investments for the long term are far more likely to do well -- but it's really hard to be disciplined enough to just leave your investments alone if you're constantly checking on them, especially if share prices are falling. While some investors are able to pull this off, it can be far better to just step back after you've made sure you have a balanced portfolio of assets you're happy with.
Checking in once a week, or even once every couple of weeks, should be more than enough -- and if you know you tend to overreact to market volatility, you may want to avoid logging into your brokerage account for even longer so you aren't tempted to make a decision you'll regret.