Top Do’s and Don’ts When Stock Markets Crash

The stock market continued its sell-off Monday, but the anticipated “crash” hasn’t happened yet.

The Dow dropped by 2.74% within the first hour and a half of trading, while both the S&P 500 and the tech-heavy Nasdaq Composite fell by over 3%. These losses have intensified fears about a potential stock market crash, with major indices down approximately 2%, 7% and 12% over the past month, respectively.

The downturn has also impacted alternative assets with gold and bitcoin prices falling by more than 1% and 5%, respectively, on Monday.

Amid a dramatic selloff that has wiped out $6.4 trillion in global wealth over the past three weeks, personal finance experts usually offer the same advice to concerned retail investors:

1. Stay calm: Don’t overreact. Take a moment to assess your portfolio and consider whether it might be a good time to invest new capital.

2. Understand the situation: Sharp stock market declines, such as the recent drop, will occur again. According to Zhu Hann Ng, founder and CEO of Tradeview Capital, a fund manager in Kuala Lumpur, there’s a drop of 10% or more every couple of years, and a slump of 25% or more every seven years.

“It’s a good lesson, and a wake-up call, to realise that irrational exuberance doesn’t keep going,” Hann said.

In recent days, financial markets have shifted from a state of confidence to one of fear as troubling milestones emerged: On Monday, SoftBank Group Corp. shares experienced their steepest fall since going public in 1998. Japan’s Topix fell 12%, marking its worst decline since 1987. Taiwan’s benchmark stock index hit a record low, and previous high-confidence investments in AI and computer chips faced significant setbacks.  Meanwhile, there were signs of instability in the US economy.

As markets rebounded on Tuesday, experts suggested that Monday’s meltdown might have been an overreaction, even though many investors continued to struggle with painful losses.

Making sense of the situation can be challenging

What just happened?

Investors and institutions have been heavily investing in different assets, including major tech companies expanding into AI. When things emerge, like a deteriorating outlook for the US economy or the Bank of Japan raising interest rates, positions must be adjusted positions and some need to sell. This selling can trigger more selling, especially during uncertainties like the upcoming US election or rising tensions in the Middle East.

“It is hard to know what the stress point for the selloff was,” said Rob Almeida, global investment strategist and portfolio manager at Boston-based MFS Investment Management. In effect, many investors had made big investments using borrowed money, he said, and many tried to exit at the same time.

Review risk of stocks

Downturns are a good time to re-evaluate your investments and assess whether you’re comfortable holding certain stocks or funds at their current prices, and consider your risk tolerance.

If you’ve made investments using borrowed money, it might be wise to reconsider whether it’s worth the risk. Leveraged positions can quickly result in substantial losses when markets experience significant declines.

Look for bargain opportunities

If you have available funds to invest, this might be a good time. Alex Joiner, chief economist at Australian money manager IFM Investors suggests: “You just might potentially be able to pick up undervalued companies.”

Meanwhile, the trading desk at Australia’s second-largest pension fund in Brisbane has put in some “fairly long hours” recently. Brian Parker, Chief Economist at the Australian Retirement Trust, which manages approximately A$300 billion ($195 billion) in savings, bought the dip in Japanese and Eurozone shares, while selling government bonds.

“If you do have some spare cash, does this mean that there’s some potential buying opportunities on the horizon? Yeah, quite possibly,” Parker said.

Identify attractive stock markets

Guy Stear, head of developed markets strategy at Amundi Investment Institute, wrote: “The pull-back has created some good opportunities, particularly in equities.” He added that Japan and certain European markets appear attractive as they have given up gains for the year despite earnings having met or exceeded expectations so far.

Zhikai Chen, head of Asian and global emerging-markets equities at BNP Paribas Asset Management, emphasised that Chinese valuations are currently low, and the Asian tech hardware sector shows significant potential for growth.

Moving forward

The markets may either calm down or continue to be volatile. But as stocks rebounded, many experts consider Monday’s selloff an overreaction, though they caution that market volatility may remain for some time.

“The market reaction was a bit extreme yesterday,” said Rupal Agarwal, Asia quantitative strategist at Sanford C. Bernstein. There remains uncertainty about whether a recession is on its way, whether companies can maintain their profits, and how geopolitical developments will unfold in the Middle East, she said.

It’s important to note that many economists and investment chiefs say the US economy remains strong and is likely poised to avoid a recession in the near term.

Hann, the fund manager in Kuala Lumpur, said the strong returns in Malaysian equities had allowed him to plan some time off in October.

“Now, suddenly, this threw things into a mess,” he said. “But I still should be on track for a holiday if the market stabilises.”

Should you buy stocks when they are down?

Buying stocks during a market downturn can be a smart strategy, provided you choose the right stocks. You could invest in some blue-chip winners that are likely to perform well in the long run.

However, it’s best to avoid weaker stocks that followed the market’s upward trend.

The same goes for selling when the overall market is down. If the stock appears to be a long-term loser, it could be wise to sell while you can. But if it’s a long-term winner, selling could lock in your loss.

Final thoughts

Panic selling during a market downturn is more likely to hurt than help your portfolio, locking in losses rather than mitigating them.

Understanding your risk tolerance, time horizon, and how markets behave during downturns is essential. With this knowledge, you can make informed decisions rather than reacting impulsively. Patience, rather than panic, is key to successful investing.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.