Whenever the stock market crashes, the knee jerk reaction of traders is to pull their investments out of the market. But the problem is, when a trader online ends up selling his stocks, it pushes the stock market down even further.
Just rewind to a few years later. In 2008, during the global financial crisis, Lehman Brothers filed for bankruptcy. This increased the unemployment rate by 10 percent. Two weeks later, the US stock market lost $1.2 trillion in value. It was the time when all investors felt as if the world is falling apart. They started selling everything they had.
Most of you must be thinking it was the right thing to do. But experts say that the long-term value of the business would have continued to grow despite the financial crisis. Some investors thought this downturn is a great opportunity to buy stocks of strong companies at a low price.
Warren Buffett says bad news is a trader’s best friend. All businesses get earning hiccups but the best of them end up setting new profit records. They always turn around.
It is human nature to invest when the market is performing well. But it is not wise at all to invest in something just because it’s going up. You must only invest if you fully understand that business. Buffett warns that investors should never act on their emotional instincts.
What they need is to disregard the mob fears and focus on the fundamentals of online trading. You must have the willingness to look foolish. Don’t pull out your investments, instead, let them be. Of course, if the business doesn’t have any long-term potential of growing, it makes sense to sell its stocks.
Tips to Invest Wisely During Financial Crisis
Long story short, it is ok to invest during the financial crisis. However, you will have to stick to some tips for staying out of trouble. Such as:
1: Avoid Panic Selling
Investors panic and sell their investments during tough times. Instead of taking this as an opportunity to buy low and sell high, they do the exact possible. This panic selling approach takes the market towards a massive decline. It makes sense to sell volatile investments and put your money in a safer place but this could impact your long-term trading goals.
2: Consider Stock as a Long-Term Wealth Creating Tool
You shouldn’t necessarily wait for the market to crash to invest. You can’t really time the market. And if you try doing so, you miss out on the best gains. If you look at it from the long-run perspective, the stock market certainly has the window to make you wealthy.
3: Invest in the Right Stock
Along with buying at the right price, you must buy the right stock, too. Pick those companies whose stocks have a profitable future outlook. Not sure if you are investing in the right stock? No problem, these pointers will help you in making the right call:
- Choose companies that dominate the market: Dominant companies are usually financially stable and successful. They have a positive future outlook. They might even have expensive stocks but since they have a potentially bright future, it’s no harm in spending more money.
- Higher return on equity: A higher ROE tells you how well a company uses its funds to make its earnings grow. A higher ROE is also a sign of stability.
- Rising dividends: Does the company have a consistent record of paying dividends? If yes, then consider it a sign that they are making consistent money.
One of the most valuable lessons you will ever learn from the financial crisis is diversification. There is no foolproof way of protecting yourself from the market crash. And a market crash can occur anytime, there is no particular political event or sector that triggers it. The thing that matters is how you are able to handle the blow.
No stock is bulletproof. Let’s suppose along with owning stock of Lehman Brothers, if you had owned other high-quality stocks, the market crash would never have bothered you much. A diversified basket of portfolio allows you to be less devastated. As long as you haven’t invested too much of your money in one sector or stock, you will do fine.
There is No Foolproof Strategy:
This is understood that you don’t need to sell your stock if the market ends up crashing. Guessing when the next crisis will hit the market is not a wise thing to do either. Very few had a trading career built on timing the financial crisis. So should you ride with it? No matter how low the stock prices go, are you supposed to sit and hope for the best? You can go for this plan. But, it will only work if you are investing in industries that have historically performed well during the crisis.
We all make financial mistakes and it is one of the best strategies to learn from. If you pulled out your investment during the financial crisis in the past, no worries. It is through our financial decision-making capabilities that we evolve as traders. No matter how wise and experienced you become in the field of CFD stock trading, you still can’t control the market. But you can control your emotions since they have a part to play in accelerating the returns. Don’t just sit on your hands, if you feel like selling is the right move, go for it.