What to do in a stock market crash
BY Harvey Jones
1st Jan 2015 Managing your Money
When traders and markets crash, the value of your savings can easily plunge 10% or even 20% in weeks or even days. That hurts, but what should you do? You have three main options: run away, stand your ground, or be bold.
You don't have to be a high-rolling City trader to lose big money when the stock market crashes. Most savers are exposed to market dips either through their personal or company pension, or other investments such as a stocks and shares individual savings account (ISA).
When to run
For many investors, the rational response is to run. If markets are falling, it makes sense to cut your losses. This can be a big mistake. Stock markets go up and down all the time, but you turn your paper losses into real losses when you sell.
The other danger is that when stock markets finally rebound—as they always have in the past—you will miss the recovery. You then face the tough decision of whether to buy back into the stock market again, and will almost certainly get your timing wrong.
However, there is one time when you should sell: if you need the money in the next year or two, or for a specific purpose such as a property deposit or to fund your retirement, then you should seek the exit.
Stocks and shares are for long-term savings, you should never invest money that you need within the next five or 10 years.
When to stay put
If you are investing for the longer term, in most cases you should simply grin and bear it. Yes, it hurts when the value of your money suddenly plummets, but that is the price you pay for the greater long-term rewards of investing in stocks and shares, which typically do far better than cash.
A market meltdown might seem at the end of the world but it is amazing how quickly they can pass.
On Black Monday in October 1987 the US market fell 23% in a day, then crashed another 25% the very next day. If you had panicked and sold at that point, you would have regretted it, as by early 1988 markets had recovered all their losses.
The younger you are, and the further from retirement, the more patient you can afford to be. Older savers should take fewer risks.
If staying put, you should still review your portfolio to make sure your money is in the right place.
When to be bold
While most of us have the urge to flee from danger, some do the reverse. A stock market crash can be the ideal time to top up your investments, because you are buying the same funds or stocks at knockdown prices.
It takes nerve to go against the herd of investors who are rushing to sell, but fortune may favour the brave.
Buying on the dips works best if you are investing for the long term. Given time, the recovery will come.
