In the past few days, I’ve received a number of messages asking why the stock market is going down and what to do if the market crashes.
Let me be honest and tell you that I’ve never experienced any stock market crash myself. Since the 5-6 years I’m active in the market, its in the bull phase. Further, during the 2008 market crash, I was too young to care and cannot precisely imagine the panic of the traders/investors involved in the market. Therefore, I may not answer this question correctly.
Further, it’s easier to make strategies for a crash. However, the real scenario might be a lot different. There’s a famous quote regarding the same by Mike Tyson:
Anyways, let us study the history of the Indian stock market to understand the worst-case scenarios. Here is the list of a few of the biggest crashes in Indian stock market history.
The worst crash was on two consecutive days- 21 Jan and 22 Jan during the 2008 recession time. On both these days, the BSE Index Sensex fell over 2,000 points . Moreover, there were 7 trading days when the Sensex fell over 1,000 points in 2008.
The stock market experts say that every investor is destined to see at least two big stock market crashes in his/her career. I hope the 2008 market crash counts as one in my journey;)
Stock market crash strategies
No matter how many strategies you’re gonna make before a market crash, when you’ll see the index down by -35% , all your strategies will become doubtful . At that time, its only your own experience and discipline that will count.
After all, it hardly takes ten seconds to sell the stock now, maybe even less if you’re in a panic. And when everyone is selling their stocks and quitting the market, it’s really difficult to stick to your strategy.
Nevertheless, there are few simple strategies that we can make by studying the past which can be a little help in such scenarios. Let’s discuss them here:
- Know the real meaning of market crash: Not every downward movement is called a stock market crash. Here’s an approximate definition of the different negative movements by the market: 10% down- Correction; 20% down- Bear market; +35% down- Stock market crash. Overall, d o not panic when you don’t need to. Bull, Bear, and correction are the part of the market and bound to happen.
- Market crash is not gonna happen in a day: During the stock market crash of 2008/09, it took almost 15 months for the market to crash by 60% . The market started falling in Jan’08 and was at the bottom on March’09. Definitely, on a few days, Sensex fell over 2000 points (like 21–22 Jan’08), however, to reach the bottom from the top, the time period was stretched over a year. In the case of a big market crash, you will get a decent time to revise your strategies.
- PLAY DEAD: I assume, you’ll agree that the 2008/09 crash was one of the worst stock market crash in India. However, if you had invested in fundamentally strong companies at that time, then playing dead could have been a good strategy. In approximately 19 months, the stock market rebounded from its lowest of 8,300 to 21,000 points. Even if you had invested at the top of the market crash in Jan’08 (Sensex-20,800 points) and had remained invested for the next 3 years, you would have got back all that you invested. During crashes, have patience if you’re holding good stocks.
(Source: Trading Economics)
Also read: How to pick stocks for consistent returns?
The economists and stock market experts believe that every investor is bound to see two big stock market crashes in his lifetime. No one can say when, but it is destined. Know the risk when you’re entering the market.
Bonus strategy: Invest heavily during such time.
As Warren Buffett use to say- “BE GREEDY WHEN OTHERS ARE FEARFUL AND BE FEARFUL WHEN OTHERS ARE GREEDY”.
Let me know what are your thoughts on the same! Happy Investing.