3 Things You Can Do When the Stock Markets Crash

 

 

 

    Portrait of scared afraid pretty woman talking on mobile phone. Gorgeous young girl in fur winter hat and jacket. Autumn fashion and communication.A cheeky word from our legal guy. The information in this article is for entertainment and education purposes only. There is no explicit or implied endorsement of any particular companiesThe author owns zero shares in the companies mentioned.

Ever since the Global Financial Crisis (GFC) it seems as though stock market crashed more often than it ever has before. This is probably true because information these days is so accessible and transparent. Live updates can be viewed on a smart phone in real time whereas before it was limited to brokers and those in the know. The result of this is giving investors the opportunity to sell shares in a knee jerk reaction to bad news without having an in-depth understanding or the share market or the global economy. Never the less, losses on the market can be confronting when you see your portfolio decrease by 10%+. Here are 5 things you can do when the stock market crashes.

When a bear (market) attacks, play dead

                Doing nothing is literally a thing that you do, especially if you are looking at a long term investment horizon. If we look back to 2009 when the GFC hit Australia the hardest, the ASX All Ords went to a low of 3,145 and has increased to 5,150 7 years later. Or to give an example of a company CBA share price went from $60 in 2007 to $28 in 2009 then peaked at $92 in 2015 before settling at the $70 mark in 2016. Now this may seem like a small return of only 16% from its 2007 to 2016 price. However, most inexperienced people sell out at the bottom making the losses very real.  

Go for low beta

If you think that the stock market is in for a long term bear market or recession, you can arm your portfolio with low beta stocks. Beta is a term used to describe the volatility of a stock in relation to its movement compared to the market. The market itself has a Beta of 1, and individual stocks are given a beta score according to how much they deviate from the market. If a stock has a beta that is greater than 1 it means that particular stock swings more than the market and is considered more risky. In other words, it’s more volatile. A beta of less than 1 swings less than the market and is seen as less risk.

Example – If a stock has a beta of 1.5 than it is 1.5 times more volatile than the market. If the market increased by 10% we could expect this stock to increase by 15%. The opposite is also true. A stock with a beta of 0.5 means that it would only increase by 5% if the overall market increased by 10%. Example low beta stocks in Australia would include Coca-Cola and Telstra.

However, this is assuming that nothing has changed in the company or there hasn’t been a major change that would negatively impact the company.

Hunt for value

Warren Buffet is famous for saying ‘Be fearful when others are greedy and greedy when others are fearful.’ This is so true for knee jerk stock market crashes. It generally means that the fundamentals of a company haven’t changed just a temporary change in market conditions. One way of identifying an undervalued stock is looking at the price to earnings ratio of a company and the industry. In general the lower the P/E compared to other stocks in the industry the more opportunity it has to increase in value. Think of it as buying the works house in the best street. Another method is the discounted cash flow but that is too far out of the scope for this piece.

It’s important that you first identify the nature of the downturn in the market. Is it just a short term reaction to an event such as BrExit or Trump becoming president or is it on a bigger scale like the GFC?

 

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