The world has changed immeasurably in 2020, with COVID-19 impacting most people, businesses, as well as the financial markets.
Jan. 2, 2021
Nobody could have foreseen the mass disruptions that COVID-19 caused in 2020. Economies stalled, people were out of work, and businesses were forced to close. It will likely take a number of years for certain industries to recover from the pandemic. Many businesses will have to close permanently, while others will be battling to stay open.
People will be out of jobs or forced to take pay cuts, with governments borrowing heavily to provide benefits for their population. While there is light at the end of the tunnel thanks to COVID-19 vaccines from the likes of Pfizer, there are concerns that a market crash could be on the way.
Governments will need to make tough decisions about when they need to cut back funding for the markets, businesses, and the general population, which could lead to turmoil. Here are a few things to keep in mind in case the market crashes in 2021.
First and foremost it is important to not panic if there is a market crash. As was seen in 2020, markets fell significantly but recovered within a few months. While the recovery from a crash is usually slower than what was seen in 2020, historically, the markets have risen to new heights once more.
The surest way to make a loss on your investments is if you panic sell. Instead of seeing a mass of red on your screen and panic selling, you should sit back and take a deep breath before taking any form of action.
Buy Some Bargains
It is during the times of a market crash that you can actually make some of your best investments, with great companies often having heavily discounted share prices. Therefore, if you have the funds available, it can be an opportunity rather than a crisis.
You may have some favorite companies that you like for long-term holdings and you can use this as an opportunity to add to your current position at a discount. Once you believe in the long-term potential and value of a company, then this approach makes complete sense if t’s price is attractive.
When markets fall significantly and you are inundated by bad financial news, it can be easy to get caught up with believing that the world is ending. In most situations, it is better to not sell your positions due to a market crash.
You will only make a loss on your investments if you sell. If you hold onto them, you can wait out the crash and hopefully see the value of your investments recover and bypass their pre-crash prices.
If you anticipate that a market crash is coming or if you want to be prepared in case another black swan event occurs, you can plan in advance and put in place some preventative measures. This is why it is vital that you have a well-diversified portfolio. Avoid being overly exposed to a given industry, geographic region, or asset class.
The extent of your preventative measures depends on your level of risk tolerance. Generally, people who are younger will place a higher proportion of their investments into equities, while people close to retirement age will prefer to stick to more conservative assets. By finding the ideal balance, you should be able to absorb a lot of the impact of a market crash. For example, when the market crashed at the start of the pandemic, the share price of travel-related stocks plummeted, but e-commerce retailers like Amazon saw their prices soar. There will usually be winners and losers during a market crash, so by being well-diversified, you can cover a lot of bases.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above.