It’s finally happened, after a record-breaking 2017 that saw the stock market climb every single month, the long-awaited 10+% stock market correction finally took place in February 2018. Because this is the first notable dip in some time and the largest one-day dips since the Great Recession, many investors started paying attention to their portfolios once again. Maybe you’re one of these investors and you are researching how to invest after a stock market crash.
While these suggestions won’t guarantee positive returns, they can be the guidance you’re looking for to gain some peace of mind as this bull market continues to run.
Don’t Worry About a Correction
A stock market correction–when a stock index declines at least 10% from its 52-week high– has happened every year since 1980, with the exception of 2017. The 11.8% correction that took place in about a week’s time was a shock to many because it happened so quickly and because the broad market only continued to climb in 2017 with no significant daily drops.
As the luster of income tax reform and the unexpected election of Donald Trump wane, reality has begun to set back into the market as interest rates rise and investors looking for the next exciting piece of news to come from the corporate world and Capitol Hill.
What makes stock market corrections unsettling, is that nobody knows when they’ll happen. But, just remember that market corrections happen at least once a year every year since 1980.
Stock Market Corrections are a Buying Opportunity
Stock market corrections like the one we saw in February 2018 can be an excellent buying opportunity. Shares are cheaper so you can buy more shares of your favorite stock, ETF, or mutual fund. When share prices go back up, you profit.
Of course, prices might not rebound until a few months later if prices continue to go down before they go up. Other stocks might continue to decline and become a “value trap” until the company leadership can fix the fundamentals to make the stock become an attractive investment again. If you need a current example, look no further than General Electric which saw a 50% decline in 2017, even though the broad market increased 20%.
We Might Be In a Stock Market Melt-Up
Many professional analysts believe we’re in a stock melt-up. There’s going to be more volatility than we saw in 2017 and we’ll see large dips in the final months or years of this bull market. Despite these dips, the market is still going to grow long-term. We probably won’t see 20% gains as we did in 2017, but you can still see your overall portfolio grow between 5% and 15%. That’s a wide range, but just remember that stocks are more likely to trend higher in 2018 than decline.
Current market fundamentals and investor sentiment are still too optimistic to usher in a bear market for the first half of 2018.
What’s that mean for you?
We will see more daily declines, but there’s still money to be made in this current bull market as investors continue to “buy the dip.”
What To Do During a Stock Market Decline
What should you do when the stock market drops a few percentage points again? You should consider doing at least one of these actions below.
Are you a “buy and hold investor?” The market is going to have good times and bad times. If you’re a young investor with several decades to go before retirement, you need to keep your money in–don’t panic and sell; you’ll probably regret that decision after the next day or when the market rebounds and you’re no longer invested.
Sell a Portion of Your Portfolio
Even if you’re a buy and hold investor, you might consider selling a portion of your portfolio to lock in the historical gains from 2017. As we just saw, you entire month or years of gains can be wiped out with a single correction. Most investment advisers are now recommending that you use trailing stops for your market positions; typically between 10% for more risky assets and 20% for more conservative, “blue chip” stocks.
Here’s a quick example. You buy investment shares that cost $100 per share and you have a 20% trailing stop. If the share price drops to $80 (20% decline), you sell your shares to protect yourself from losing more money.
You might even consider putting trailing stops on your current investments so you don’t lose all of your gains. If your current investment has appreciated 30%, a 20% trailing stop when shares prices drop 20% from their current level.
There’s one piece of advice for trailing stops: Set email alerts with your brokerage, never standing trailing stops in your brokerage trade screen. Institutional investors with advanced data resources can see any open orders and can intentionally try to lower the stock to buy at a discount. Also, your brokerage might “accidentally” sell your stock too soon or too late if you don’t update the trailing stop. So, set an alert and sell when the alert reaches your inbox; it’s more hands-on but the safer option.
Shift Away from Index Funds
Index funds are a great investment for beginners because they’re low maintenance and only seek to mimic the market. This is good news when the market grows, but bad news when the market declines and you’re trying to limit your portfolio loss.
Instead, you might consider these active portfolio strategies that can help you lose less money in a market downturn or potentially profit while the broad market loses money. After all, there are still winners in a bear market; even the 2009 Great Recession. You might also consider investing in real estate assets so you’re not entirely dependent on the stock and bond market too.
You should still consider keeping some money in your index funds for tax reasons and long-term investing. Remember that the market will return to positive territory again and you don’t want to miss it.
Hire an Advisor
If you’re a DIY investor, maybe you realized during the most recent market correction that you have a harder time riding the market roller coaster than anticipated. If that’s the case, you should strongly consider investing with a financial advisor.
If you prefer an in-person financial advisor, interview your financial advisor by asking him a series of investing questions to get a feel of his investment philosophy and how much personal attention will give your portfolio; are you 1 of 100 clients or 1 of 5,000 clients? Personal attention can make all the difference in the world, especially since you’re paying management fees that DIY investors aren’t.
When you can’t find a local advisor, you might also consider going with Vanguard Personal Advisor Services.
Market downturns are always gut-wrenching but it’s part of investing. Instead of panicking, you’re best option might actually be doing nothing, taking a few gains off the table, reallocating your portfolio to more conservative investments, or a combination of all three. After all, when everybody else is selling can be the best time to buy quality investments at a discount. That’s the secret to investing during a stock market crash. Now, you just need to find those high-quality investments.