Michael S. Schwartz, CFP®, AEP®
I apply a multidisciplinary approach to wealth management dovetailed with structured tax planning.
A stock market crash is an opportunity to increase your gains, say three financial planners.
You can get quality stocks for a lower price or get more for your monthly investment contribution.
Some investors sell percentages of their shares when the market is high to re-invest when it’s low.
There’s been a lot of buzz on the internet about a potential stock market crash, with many new investors nervous about if and when it will happen. But, depending on your investment strategy, a market downturn may not be an entirely bad thing.
We asked three financial planners to explain why you shouldn’t panic if the market goes down. They also shared their tips for mitigating your risk, and even increasing your gains, regardless of what the market is doing.
1. A market downturn is an opportunity to get the same stocks at a cheaper price
The goal of investing is to buy low and sell high. First-time investors typically do the opposite, says Jovan Johnson, financial planner with Piece of Wealth Planning. When the stock market crashes, there’s a tendency to get nervous, and new investors may either sell their shares or stay away from the stock market entirely.
But long-term investors, who’ve had a good amount of experience riding out the highs and lows of the market, often see a downturn as an opportunity to buy more because they can get the same stock at a cheaper price.
This approach can be deployed by a new investor if they are focused on quality stocks and a diversified portfolio. Investing in exchange-traded funds, which pool a variety of securities, is a good place to start, Johnson says.
“I typically recommend investing in ETF funds so you’re automatically diversified, and if one company or two companies fail, it would not have a drastic effect on your investment,” Johnson says.
2. Contributing the same amount monthly can help you pick up more shares ‘on sale’
Historically, people make most of their money during bear markets, or when the market sells off more than 20%, says Michael Schwartz, financial planner with Magnus Financial Group. They buy when others are selling. This might sound like a maneuver only an advanced investor can pull off, but actually it’s quite simple.
If you’ve automated your investments by contributing a certain amount every month, you continue that strategy even during a downturn. If stock prices drop, you get more shares for your money; if they go up, your shares make money.
Automating your investment contributions takes the guess work out of trying to time the market. The approach, known as the dollar-cost averaging, mitigates the risk that could result from putting a lump sum of money into the market at the wrong time, like while the market is high.
“There’s always going to be a reason not to invest. There’s always going to be a problem that is surfacing in the markets. Removing the emotion from your investment decision, and focusing on a thoughtful, disciplined approach, is how you create a wealth strategy,” Schwartz says.
Using a robo-advisor like Betterment or Wealthfront can go one step further in removing the emotions from your investing decisions by building and maintaining your portfolio for you.
3. You can accelerate the growth of your 401(k)
If you don’t have cash on hand to invest, it may be a good time to increase your 401(k) contribution during a market decline, even if it’s for a short period, says Derek Lunka, a financial planner with Lunka Investment Group at Benjamin F. Edwards & Co. It’s another way to take advantage of lower share prices following a crash.
“It’s an easy way. It just comes right out of their paycheck. It usually takes a week or two for it to go into effect, just because of payroll semantics, but they should be able to at least participate while the market is down, and do it for as long as they can stomach the lower cash flow from their paycheck getting thinned out,” Lunka says.
4. You can re-invest some of your previous gains
Take a cue from more experienced investors and sell off a small portion of your well-performing assets during a market high, like 10% to 15%, Lunka says.
Hold onto that cash and then, when the market goes through a downturn, you can re-invest those gains to take advantage of cheaper shares.
For early investors, Lunka recommends sticking to mutual funds or index funds rather than deploying this strategy with individual stocks. Seek out quality investments that have seen their prices decline due to broad market sell-offs.