For beginners, 6 tips to stay calm during stock market crash

With fears about a global recession, stock market investors have parallel concerns. This is normal and logical, as markets are very sensitive to any variables and translate them faster and proactively to events.

Investors, especially beginners, always need instructions to help them, especially in periods of decline, so that their decisions are not impacted by emotions.

Be fearful when others are greedy, and greedy when others are fearful.

This quote comes from the “Oracle of Omaha” himself, Warren Buffett. As the long-time chairman and CEO of Berkshire Hathaway Inc., Buffett made his fortune as one of the greatest value investors in history. His adage is simple and holds true: When the crowd is panic-selling and fear is running high, investors can find great buying opportunities when stocks go on a fire sale. Buffett still goes on buying sprees himself using Berkshire’s ample war chest of cash when markets experience a downturn.

Great choices here include blue-chip, dividend paying large-cap US stocks with strong balance sheets and good cash flow. Other great choices include low-cost exchange-traded funds, or ETFs, that track a well-known stock market benchmark, such as the S&P 500 or Dow Jones Industrial Average.

Don’t look for the needle in the haystack — just buy the haystack.

This quote comes from the late John “Jack” Bogle, founder and former chairman of the Vanguard Group. As the inventor of the index fund, Bogle was strongly in favor of a low-cost, passive approach to investing.

Bogle disliked stock picking, noting that most retail and professional advisors couldn’t beat the market consistently over time. He also noted that during crashes, the risk of single stocks taking a severe beating, getting delisted or even declaring bankruptcy were significantly higher.

Bogle advocated for a diversified portfolio of hundreds, if not thousands of stocks, from all market capitalizations, sectors and geographies. Investors who subscribe to this approach can significantly lower their drawdowns and volatility during a crash.

Don’t time the market, always stay the course.

A common mistake investors make during a crash is panic-selling at a loss and holding what remains of their portfolio in cash to “buy back in when the market hits a bottom.” The painful reality is that timing the actual bottom is very difficult.

Market crashes and bear markets can be drawn out, highly unpredictable, and are capable of numerous false rallies, also known as “bull traps.” Often, investors who try to time the market end up missing the rebound, which can severely hinder their future returns.

Instead, investors should commit to staying the course by holding positions they believe in and contributing more capital if they have it via dollar-cost averaging.

Don’t borrow money to invest.

“Buying the dip” during a market crash could lead to outsized returns later down the line, but it comes with a caveat: Don’t use money that you can’t afford to lose.

Examples of this include using your emergency fund, a home equity line of credit, or HELOC, student loan or even credit cards to buy stocks during a market crash.

This is highly risky because as mentioned earlier, timing the bottom is incredibly difficult. There is always a chance that after you buy in (with borrowed money), the market takes another tumble, and now you have to make loan payments without any cash to service that debt. Leverage can be a great tool to increase returns, but using it during a bear market is excessively risky.

Don’t neglect the role of alternative investments.

A common mistake made by many investors during bull markets is an oversized allocation to equities. It’s not uncommon to see investors with 100% in stocks.

This approach is highly risky and inefficient. Adding non-correlated assets such as bonds (especially Treasurys), gold, commodities or real estate can lower risk without impacting returns too much.

During a crash, some of these assets can soar in value, allowing investors to sell them at a profit. Investors can then use these proceeds to rebalance into their pummeled equity positions, thereby buying them at a low price. A crash is a good way to test whether or not your risk tolerance is sound. If not, consider adding more bonds, cash or alternative investments to your asset allocation.

Tune out social media.

The colorful finance and investment personalities on TikTok, YouTube and Reddit can be quite doom-and-gloom sometimes. Remember that these individuals often sensationalize news and are presenting an opinion, not fact.

It’s easy to get caught up in an echo chamber when the markets are melting down and emotions are running high. If you find yourself panic-scrolling and engrossed in your social media feed, consider deleting the apps and taking a breather.

A conscious step away from the flashing headlines can help you think clearly and objectively about your investment portfolio. Making independent, rational decisions based on unbiased evidence is key to surviving a market crash.

Source: Wtop News website