Four Things to Do in a Stock Market Crash

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“There are four things you should consider when the market starts to fall.”

1. Sell everything if you think it is starting to crash but don’t hurry.

When the market begins to crash you will likely not hear a thing in the media about it. Spotting a crash has to come from you. If you think it’s going to crash, start selling. Don’t do it all at once, prune your holdings. Sell the shares that have done well but are now tired. Then sell the boring stuff. Then sell the shares that are trending down. Then sell the rest. Don’t rush into it, you could be wrong, but a crash will tend to develop from a bubble. The bubble will peak, then wobble, then burst.

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2. Don’t sell anything once it has crashed.

If you missed the crash and the market tanks and you are holding the baby, don’t sell after the event. Markets always recover, even the worse crashes have a comeback. If you have good stocks they will come back, so there is no point selling at the bottom. Buy and hold theory says you shouldn’t sell at all even if there is a crash ahead. This is because it is terribly hard to foresee a crash and terribly hard to get back in without missing the bounce at the bottom of the crash. So if you sell at the bottom you might miss the bounce and make your investing life even worse.

3. Short puffed up companies.

Often the market doesn’t crash overnight. It can take weeks, even months. You probably know some companies whose share prices have gone to the moon for reasons you don’t understand. Why not have a little of that short? To do this you need to organize the ability to go short in advance, so get that capability in place for such an outcome. Don’t go mad or get greedy. The market is crashing, everything is going down, time to add a little spice to your profits.

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4. Buy back in after the crash.

The way to spot the bottom of a crash is to listen to the media. The bottom is when the market screams the market is crashing. It ISN’T crashing, it HAS crashed. The media will scream about a crashing market at the very moment it has hit the bottom. So this is the very time you want to think about buying in again. But there is no hurry, the market doesn’t snap back overnight, you may have weeks or months to pick the perfect shares for your new portfolio. Remember, if there is silence in the media there is more to come, the media reports the past not the future so consider the press a counter indicator.

In summary.

Never sell all your stocks because you think the market will go down. Only ever sell if you think the market is going to crash, which is a fall of about 25%. If you think the market is going to fall much less, say 10%, it isn’t worth the effort, time and risk to sell. Only consider selling if you think the market is going down in flames. Then remember, the market always crashes, has always crashed and will always crash, it’s just a matter of when.

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