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Question
What should I do when my investment is crashing?
Answer
In the world of investing, market volatility is sometimes inevitable and not everyone is prepared for this harsh reality. Today, let us take some time to address what you should do if your investment crashes.
You can tell an investment is crashing when there is a sudden drop in the stock prices, typically above 10% in a short amount of time. It may be due to broad market factors, company-specific issues, or even pandemics like COVID-19 in 2020. Sometimes, these things happen without warning, which is why this question is relevant to every investor in the stock market. As a result of this, many investors panic and begin to sell their stocks to curb further losses.
The COVID pandemic saw one of the most recent and biggest market crashes in 2020 with the S&P 500 losing about 12% of its value very quickly and Dow Jones experiencing its largest one-day drop of almost 13% on March 16.
So, what should I do when my investment is crashing?
Let me start by saying that this answer is mainly for those who have chosen to invest with a long-term mindset and have strategically diversified their investment portfolios. A diversified investment portfolio will mean that you have different types of funds like stocks, REITs, properties, bonds, ETFs and so on, in your investment basket cutting across the four risk levels (low, medium, high, and very high risk). The more types you have, the more diversified your portfolio becomes. Here are some steps you need to take if your investment begins to crash:
- Remain calm and avoid making any uninformed decision: I understand, this is your life savings. However, you need to be sure that whatever money decision you are making is worth it and trust me, there is no way you can do that when you panic. In other words, resist the urge to make emotional and irrational investment decisions based on short-term market movements.
- Research time: Now that fear is out of the way, it is time to do your due diligence by conducting a simple stock research. You want to understand the underlying reasons behind the drop and then evaluate whether the investment is worth holding based on the information and your risk tolerance. Every form of investment comes with an inherent level of risk but what makes it worthwhile, especially in the long run, is your ability to ride out the good and not-so-good seasons. If after your research and evaluation, you feel the need to sell the investment, by all means go ahead. This step should be included in your regular investment routines and not only when a crash happens.
- Stay diversified: If you already have your money spread across different classes of assets, you should have reduced to a good extent your investment risk and the other investments not affected can help offset some losses. Sit tight and trust your diversified portfolio to give you a softer landing after the storm. If you have all your eggs in one investment basket, do you now see the need to have one? It is not too late to start now to do the needful. By doing this, you will spread the risk and reduce the impact of the market decline to an extent.
- Get professional financial advice: Truth is, when the going gets tough, it does not hurt to ask for help. Crashes can get to even the most experienced and confident investors, leading them to making wrong decisions. Don’t be afraid to seek professional advice when you need to. An added benefit of this is to get an objective and personalised guidance on what steps to take next. MoneyAfrica has a team of seasoned consultants, and if you feel the need to get financial advice and consultation, click here.
Before I go, it’s important to remember that experiencing a drop in the value of your investment portfolio, although distressing, is not uncommon. Market downturns are a natural part of the investment cycle, and they often present opportunities for long-term investors who remain calm and strategic in their approach. The key to staying afloat is to stay informed while maintaining a well-diversified portfolio that aligns perfectly with your risk tolerance. Also, a market crash could present buying opportunities for great investments at discounted prices even as others are panic-selling. This decision should be based on thorough research.
At MoneyAfrica, we encourage individuals in different phases of life to take charge of their finances. If you have any questions or concerns about your investments or you would like to discuss your portfolio strategy further, join our community by clicking here. We just concluded a webinar series in partnership with SendSprint for entrepreneurs and freelancers looking for payment solutions for their international businesses. You can watch the recap of the last session here, after which you should fill this form to gain access to the loads of resources SendSprint has provided for you!
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