One Thing Never To Do When The Stock Market Goes Down

Why is panic selling the one big mistake investors commit when a stock market goes down? Let’s find out

Last Updated July 23rd 2021

5 Min Read

Worrying about when the market will crash won’t help, but learning what to do before, during, and after it occurs will.

The stock market is highly unpredictable. So new investors need to expect volatility and always be braced for it. In an estimate from 1970 to 2021, there were almost 29 stock market crashes or corrections of 10% or more. You might know what to do when a market crashes, but it is also essential to be aware of the one thing you should never do when the stock market goes down - panic selling.

Panicking, then selling off your stocks, and finally steering clear of the market for a long time or sometimes forever is not an advised method and creates enormous losses for investors. When corrections and crashes happen, it is usual that some of your holdings might drop a lot. Even though the overall market sinks 20%, one or more of your specific holdings could fall by 40% or even more.

What Not To Do When The Stock Market Crashes?

Never panic when the stock market crashes, because the market will crash from time to time. Panic selling is a moment where investors decide that they want to go entirely to cash. In fear of losing their investments, investors sell everything they have in the market despite the quality, effectiveness of their holdings, and most probably without regard to taxation. This is often an investor’s first reaction when the stock market is going down. It will eventually lead to a drastic loss.

An easy way to manage a market crash and your hard-earned savings are to diversify your investment portfolio. Holding a variety of stocks would highly help investors in cutting out their losses. Now let us see why panic selling is the one thing never to do when the stock market goes down.

Key Takeaways

A stock market crash can induce a lot of fear and anxiety in investors, leading to panic selling and huge losses.
Panic selling is the one thing never to do when the stock market goes down, as it might lead to enormous losses for investors.
Being well aware of your risk tolerance would help investors choose suitable investments and avoid panic selling during an economic downturn.
One effective investment strategy is to diversify your portfolio with a wide variety of investments to mitigate risk during a market crash.

Why Avoid Panic When The Market Goes Down?

Stock investments help you safeguard your retirement and ensure a wealthy future. But today, most people are scared to invest their savings in the market due to a lack of confidence. The series of financial crises and the market volatilities have caused a high level of fear in them. So what to do when a stock market crashes and how to cut your losses? A sound investment strategy with detailed research and a risk management plan is all you need to ensure that you thrive safely when the market crashes.

When a stock market goes down, investors are often driven by the fear of losing their hard-earned savings. This panic might lead them to cut losses and try to save as much as they can. It is essential to understand that the market is cyclical, and stocks will go down at some point in time. But a downturn is just temporary, and the market will rise again. It is always advised to think long-term and avoid panic selling when stock prices are at their all-time lows.

Check Out: How to Cope With a Stock Market Drop

What Are Few Significant Bear Market Strategies?

Panic selling might be the one thing never to do when the stock market goes down. But the best thing to do during a downturn is to have patience and create a reasonable investment strategy. Long-term investors know that the market will recover eventually, and it might even soar to record-heights afterwards. Moreover, a crash is often an opportunity for investors to reap the full benefit of the stock market. Therefore, investors should be well-positioned for the eventual rebound.

Panic sellers might miss out on this market rise if they act out of fear. This is why a well-planned bear market strategy is imperative. It will help you protect your portfolio from the heavy losses and panic of a stock market crash. So, wondering what to do when the stock market goes down? Here are two simple things to keep in mind.

Be Aware Of Your Risk Tolerance

From an investment perspective, risk tolerance is the amount of risk that an investor can comfortably take or the degree of uncertainty that they are capable of handling. Assessing and understanding your risk tolerance is of utmost importance to construct an optimal portfolio. By evaluating the risk you are willing to take, you can develop a solid investment strategy.

Risk tolerance has several factors: investor’s age, investment goals, holding period, investing time horizon, and other financial commitments. For instance, if you are at your pre-retirement age, you most probably want to preserve savings and generate income in retirement. Therefore, the best stocks retirees could invest in are less volatile stocks. But, on the other hand, for millennials, a long-term investment strategy might help them benefit from the ups and downs of the market.

However, the risk tolerance of an investor might change over a specific period. Therefore, it is always best to take the help of a professional financial planner to access your risk tolerance efficiently. Well, ultimately, you should be ready for the worst and have a solid strategy to hedge against your losses.

If you opt for low volatile stocks, you can even purchase a portfolio of bonds called a bond ladder. Also, investing in the stock market at predetermined intervals helps you capitalize on an investing strategy called the dollar-cost-averaging. Rather than attempting to time the market, this method averages your cost of owning a specific investment by purchasing shares when the market is high and when the market is low.

Don't Miss: 5 FTSE Stocks To Buy For A Stock Market Crash

Always Be Prepared And Limit Your Losses

The first thing to do before investing in the stock market is to understand how the market works. This will help you in being prepared for any downturns. In addition, by understanding the market accurately, you can decide whether to buy or sell when the market goes down.

Blindly investing in any stock without having a solid strategy may cause you to lose a significant amount of money in a market crash. Therefore, to limit losses, it is imperative to diversify your investments and reduce possible risks.

The Bottomline

Now you know the one thing never to do when the stock market goes down. Panic selling will lead to a considerable loss of your hard-earned savings. However, you can easily avoid such mistakes by understanding how the market works and creating a risk-proof investment strategy.

Finally, if you are investing in the stock market, it is crucial to have the patience to stick with your strategy. This will help you generate good returns from your investments in the future.