Why the Worst Times Can be Good Times to Invest #Corona Virus

During recession greed dies, frugality survives.

Let’s shine a light on the stock market crash “bogeyman” and take a good look at him.

What is a Stock Market Crash?

First of all, let’s step back and understand what exactly constitutes a stock market crash and what doesn’t.

Some traders are quick to call any market decline a “market crash,” which isn’t accurate.

There are actually three different levels of market decline, And they are all measured from the market’s recent high to its lowest low:

• Pullback / Dip: A market “pullback” or “dip” is a short-term downturn after a broad longer-term uptrend. In a pullback, the market may decline anywhere from 5% — 9%. Sell-offs of less than 5% are generally considered the normal oscillations of the stock market.
• Correction: A correction is a decline between 10% — 19% from a recent market high.
• Bear Market: A bear market is a 20% decline from recent market highs. It’s usually a sustained downtrend in several major stock market indexes that lasts months or years.
• Finally, there’s a “stock market crash,” which is a large and fast decline in stock prices that occurs over a period of just a few days or weeks. Crashes are usually accompanied by investor panic, such as when The Dow Jones Industrial Average (DJIA) fell -23% in a single day during Black Monday (October 19, 1987).

So, What Causes a Stock Market Crash?

There are many things that can cause stock market pullbacks, corrections, bear markets, or outright crashes.

One thing to keep in mind is that stock market crashes and deep bear markets are often caused by a combination of some fundamental economic disturbance that’s compounded by an emotional human reaction.

• Irrational Euphoria: Investors can experience irrational euphoria and bid up the prices of stocks (and other assets) to levels that are disconnected from reality. Once “the music stops” and everyone sees reality, prices can come crashing back down to earth.
• Speculation / Asset Bubbles: Similar to euphoria, investors can become highly speculative and make investments (often fueled by borrowing debt) well in excess of reason or their ability to repay.
• Geopolitical Events: Unexpected high-impact events such as natural disasters, terrorism, wars, or plagues can cause instability in markets.
• Slowing / Shrinking Economy: An unhealthy underlying economy can drag down many different businesses as well as consumer and investor sentiment.
• Overstretched Valuations: Bull markets that run too far, stretching valuations beyond reason, can set the market up for a period of extended decline.
• Too Much Debt: Excessive borrowing can cause bubbles, euphoria, and stretched valuations in many different areas of the economy. Looking back at history, corporations, governments, and consumers have all been guilty of taking on more debt than they could handle. When it comes time to pay back borrowed money, defaults on debt can cause markets to plummet.
• Trading Algorithms: Trading in stock markets is increasingly driven by computer-based algorithms that automatically make trading decisions and execute trades in under seconds. If many of these algorithms react to the same market signals and decide to systematically sell at the same time, it can cause fast declines in the market.
• Consumer Panic / Loss of Faith: If consumers lose faith in the government, currencies, banks, or other major institutions it can cause panic to spread to the stock market.

let’s look at this table which shows the largest declines in U.S. history:

Some market crashes are long and some are short. And Yes, they’re brutally painful when they’re happening. And yes, they can be devastating to your wealth.

In such a situation, Don’t try to time the market. It’s very difficult to do well and missing out on just a few days of strong market performance can seriously hurt your long-term returns.

Some Stock Market Declines Are Healthy and Normal

Some traders have a tendency to dread and bemoan any decline in stock prices as if something has gone wrong or the market has failed to live up to its promise of reliable profits.

While the market has consistently delivered incredible profits over the last 100+ years, there have been many pullbacks (5% — 9% declines), corrections (10% — 19% declines), and even bear markets (20%+ declines) that are a healthy part of the long-term growth of our economy.

To be clear, I’m not saying every bear market is a normal event that investors should welcome. Many were driven by massive underlying problems in the market, economy, country, and world.

Healthy markets regularly experience pullbacks and corrections. Even bear markets are a normal part of long-term economic growth.

Some stock market declines are normal and not every decline is a “stock market crash.”

To survive a stock market selloff, don’t panic, tune out the noise, stay diversified, carefully analyze your situation, and look for high-quality stocks to buy at discount prices.

How Do I Survive a Stock Market CRASH?

Here are a few insights on how to handle a stock market sell off:

Don’t Panic

First off, try not to panic.

It’s important to keep a level head and evaluate your investments, financial goals, and personal risk tolerance with a clear, analytical mind.

You may have to fight your instincts and tap into your logical mind.

If you decide to stay invested, that’s fine. If you decide to buy more stocks, that’s fine. And if you decide to sell everything, that’s OK too.

Just make sure whatever decision you make comes from a place of thoughtful logic rather than reactive panic.

Be Patient

Remember that it will take time for markets to recover. And the process will be emotionally and financially painful.

While there’s nothing you can do to speed up the recovery, there are smart decisions you can make today that will pay off tomorrow.

Turn Off The News!

The news media goes into a frenzy when markets sell off.

They fuel investor fears in order to boost how many people consume their content. Do your best to tune out their noise so you can keep a level head and make smart decisions.

I’m not suggesting you bury your head in the sand and pretend nothing is happening. But don’t watch the talking heads on financial TV all day and hyper-analyze the market’s every movement.

Stay Diversified

You should always be well diversified when investing in stocks, this is especially true during a bear market.

If you were to over-concentrate in any one area of the market, you could become overexposed to risks particular to that area.

For example, imagine all you owned were 10 bank stocks right before the Global Financial Crisis in 2008. You’d be devastated.

You should always be diversified. But a market sell-off is a good chance to double check.

Don’t Try to Time the Market

Trying to time the market (for example, selling everything because you expect an imminent downturn and then jumping back in because you expect an imminent rally) is a bad strategy.

It’s very difficult for investors to correctly time the market. And when they try, it often comes at a high cost: missing out on big gains.

Get Defensive

Depending on your investing style and goals, a market sell-off could be a good opportunity to shift towards a more defensive investing strategy.

Maybe you want to move out of small cap stocks or high growth stocks and into dividend stocks, index funds, or even bonds?

It will be a personal decision. Just make sure you decide from a place of careful logic and not a panicked flight from the stock market because it’s selling off.

Buy the Best Stocks

You should always want to own the best stocks possible, regardless of market environment. And this is especially true during a market downturn.

As markets decline, companies will continue to report earnings on a quarterly basis. This is a huge opportunity to see how different companies and industries are handling the downturn.

If one of your stocks seems to really be suffering, with sales and earnings in rapid decline, maybe you should consider finding a company that’s weathering the storm better.

All stocks tend to get caught up in a market sell-off, but the best high-quality stocks tend to recover faster and higher than the rest of the market!

The Power of Stock Market Recoveries

When the market sells off hard in a correction or bear market, it has a tendency to rally just as hard afterward.

Deep market sell-offs can act almost like an overstretched rubber band that snaps back into place, driving a fast and strong recovery.

Even though recessions can do lots of damage to your portfolio Investing after a market downturn allows you to buy shares of high-quality companies at low/discount prices and ride the market recovery for strong returns.

Which leads to one of the toughest questions of all: When do we jump back in?

And, how do you know when the time is right?

To be honest, it isn’t an exact science. It’s especially hard because the market starts to recover long before the recession officially ends.

So knowing when to shift strategies requires a mix of art of science to get right, and there are a few clues that can help point us in the right direction.

First, it’s important to keep this simple rule in mind:

Deciding when to get back into stocks during a recession is an exercise in balancing risk vs. reward. At any point in time, ask yourself, “How much reward is really left by continuing to bet against this market?”

Recessions don’t last forever and markets don’t decline forever. At some point there’s not much reward left in betting against the market, and you’re probably better off shifting your strategy.

When deciding the risk / reward trade-off we can look at how far the market has declined from its peak.

For example, if we’re 15 months into a recession and the market has declined by -45%, there probably isn’t much downside left.

Now, there will always be situations that “break the rule” and fall far outside the normal range. But overall, in a situation like the above, nine times out of ten you’re probably better off putting your money in high-quality growth stocks (betting on a recovery) than in a triple leveraged inverse ETF (betting on more declines).

The point is this: As recession duration and declines continue to accumulate, you should be shifting towards an increasingly bullish stance.

Plus, keep in mind that you don’t need to pick the exact top (peak) and bottom (trough) of the market. That’s nearly impossible to do correctly, so don’t even try.

Traders get burned when trying to time the market because they’re overly risk-averse and rely on emotion-driven decision making rather than data and analysis.

Warren Buffet has a quote that sums it up nicely:

“Be fearful when others are greedy and greedy when others are fearful.”