What should I do if the market crashes?
This won’t take long to answer. If you have set up a well diversified portfolio, are investing for the long term and your time horizon is many years: you should do absolutely nothing!
The worst possible thing you can do is react irrationally. You do not realise gains or losses until your investments are sold, so if you sell during a market crash you will be getting less back. The best course of action is to hold on to your investments until the market recovers, which it will.
If you have kept cash on the side (also known as ‘dry powder’), you will be in a very fortunate position to be able to add to your portfolio and take advantage of the cut-price assets. If a top quality company with no obvious problems and a promising future is available at a much lower price than you purchased it for previously, you can use the opportunity to add to your position and reduce your average cost per share.
Another way to look at this is if you were happy buying a quality product in the supermarket for £5 and a promotion reduced that product to £3, you would likely be happy for the saving and stock up – you wouldn’t be scared to purchase it just because the price reduced. Warren Buffett once said that it’s wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”
Of course, there are also good reasons for selling a stock – have a read of our next article to learn more.