How to Cope With a Stock Market Drop

5 Pro Tips to deal with a stock market decline

Last Updated July 23rd 2021
4 Min Read

Stock market fluctuations can be very wild and scary, but it’s important to remember that these fluctuations are normal. In fact, they could hint at a healthy market, in most cases. It’s important to always look at the big picture and remain confident during stock market crashes. 

For instance, let’s consider Warren Buffet’s portfolio. In the late 1990s, shares of Coca-Cola were priced incredibly high, and Warren Buffet had around 10% ownership of Coca-Cola at the time. Later, when the stock crashed by nearly 50%, he was asked why he didn’t sell the shares. To this, he replied that he was not a “nimble.”

The billionaire investor did not respond to the stock market crash in a way that most people thought he would. He remained calm and held on to his assets. As a result, the Coca-Cola (KO) shares remain one of Berkshire Hathaway’s biggest holdings today. 

So how do you deal with a stock market drop? Here are some fundamental things to remember and a few tips that many industry experts swear by. 

5 Pro Tips to Deal with a Stock Market Drop

1. Be Patient 

Being patient while sitting in cash is crucial for a stock market investor. This basically means keeping money in short-term bonds or your money market account. That is a place where you can get your hands on it if you have to.

It would help if you were willing to do this for an extended period while you’re waiting for these stock market fluctuations to take place.

This is how you will be able to jump over 6-inch bars as the stock market is likely to give you these jumps once every five, six, or seven years. Sometimes it can happen more often.

2. Get Ready to Load Up When the Market Crashes

Do the necessary research and be ready. 

You must examine, learn and shortlist a few companies that will shoot up once the market comes back to normalcy. This preparation helps you buy the right shares at the right time and get a great deal on them too.

3. Know When to Cash Out 

Stock markets swing both ways, so when the market reaches the other extreme, it’s crucial to be prepared to exit and cash out.

Investors wait and watch for years as stock prices rise in prices while remaining unsure of when exactly it will drop. When a particular stock has been up for a long time, you can’t know for sure about the time that it will fall. All you know is that it is going to crash. So it is necessary to remain vigilant and understand when is the right time to cash out.

Read More: 7 Tips On When To Buy A Stock And When To Sell A Stock

4. Have Realistic Expectations 

There are several things that you can take control of while you have time to wait. These include items that fund managers can’t do; they can’t sit in cash for long periods.

When you find yourself with a lot of time available, research and find the companies that you know are suitable and/or likely to perform well in the future. Once you’re ready with the information, you’ll be ready to invest when the stock market drops. 

5. Remember to Diversify 

Diversification is essential to decrease the risks of an investment portfolio. When the stock market is normal, investors purchase stocks or shares of various entities or companies to ensure their exposure to any one asset is limited.

When the market crashes and the fear sets in, diversification is probably the last thing on investors’ minds. Buying stocks of any asset in large quantities, for whatever reason, can be very tricky. When the market crashes, a decision like that can shake the balance of your portfolio. 

If you’re planning to invest during a stock market drop, then keep portfolio diversification in mind. If you are looking to invest in stocks, it may be a good practice to diversify across sectors, market capitalization, etc. The intention is to prevent risk concentration. If you over-expose yourself to risks in one particular stock or sector, and if that crashes, then the likelihood of incurring a substantial loss increases.

In conclusion

Remember, stock markets are volatile by nature. They are receptive to various political, social, and other macroeconomic factors. When markets crash, you need to ensure that you remain clear-headed and don’t make the wrong decisions. Hence, please pay close attention to your choices and assess them critically. Try to look at both sides of the coin and follow the suggestions mentioned above to deal with a stock market drop.

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