Though relatively infrequent, stock market crashes are a reality of investing. But these are events that can make or break my portfolio, depending on what action I do or don’t take.
With this in mind, here are three things that I would never do during a stock market crash.
Sell all my holdings
Every now and then, something bad will happen out there in the world and investors will take fright. I say investors, but more often than not, a lot of the selling being done is by stop-loss algorithms.
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These systems are designed to start selling stocks if their prices fall below a certain point. Then if a pre-programmed threshold is breached — say a fall of 10%, for example — the whole portfolio might be sold.
The thing is, the same hedge funds and trading firms employing this downside protection strategy will also buy back in if stocks start rising again. This obviously creates huge volatility and a lot of uncertainty.
But it’s important that I don’t panic and sell my shares if this frantic activity causes a full-on crash.
A good example I’d use here from my own portfolio is e-commerce platform Shopify (NYSE: SHOP). I bought this growth stock in June 2020 and it went on to double inside 18 months. Then interest rates started rising in late 2021 and growth stocks were plunged into a deep bear market.
At one point last year, I was actually down 65% on my original invested capital!
However, I never sold my shares. Indeed, because of the ongoing operational progress at Shopify, I actually topped up my holding a few months ago. And I’m sure glad I held onto the stock, because it’s bounced back 83% this year.
If I’d sold when my holding was down, I would have turned a paper loss into an actual loss. So this demonstrates the importance of not being scared out of a position when the market nosedives.
‘Doomscroll’
Wikipedia defines ‘doomscrolling’ (or ‘doomsurfing’) as “the act of spending an excessive amount of time reading large quantities of negative news online“.
Clearly, in the midst of a stock market crash, such negative news flow in the financial media will rise dramatically. So it’s important not to get into a habit of reading such stuff, which is obviously easier said than done when there’s a lot of it about.
Similarly, I wouldn’t check my portfolio multiple times a day while it’s falling. That’s because psychological studies have shown that for humans the pain of loss is three times the joy of gain.
Therefore, refreshing my brokerage account over and over again is like a form of self-torture, which can’t be good for my mental health.
It’s far better that I log off and take a relaxing bath, walk the dog, spend time with my family and friends, or even meditate. Anything but doomscrolling through my falling portfolio!
Never forget why I’m investing
Warren Buffett said “Cash combined with courage in times of crisis is priceless“.
It’s vital to remember than I’m a long-term investor and must have the courage to endure tough market environments. And I should have cash ready to take advantage of the opportunities that a stock market crash will inevitably throw my way.
