WHAT TO DO WHEN THE MARKET CRASHES?

             Introduction

You need skills of a different type in order to make money in a falling market.  When the market crashes in a big way, the first reaction is to get panicky.  Falling markets have a numbing effect on the mind.  The emotional side would force you to look at the dark side of the coin first.  The losses look unbearable or even unthinkable.  It is a red screen all over the place.  No green tick anywhere.  Such a sordid and scary scene that we do not witness during normal days.  You would see for the first time, winners and losers performing a lethal dance in front of you.  In a crashing market, there are no winners.  The only winner is the ‘cash’ component that you hold.  Of course, cash is king ALWAYS.  You would witness the best stocks; the very best stocks or the so-called gems fall like nine pins.  The stock market is actually a house of cards. It is fragile and pretty weak internally—but does not look like that during normal days.  We begin to build castles in the air, being used to looking at the green screen almost every day, especially in a bull market.  The humongous profits made during this phase would melt away within a fraction of a second—if you do not rise to the challenge and take appropriate actions.

Control emotion

Let us face the reality.  Yes, the market has crashed.  The real gems have taken a beating.  First, it was 10 percent; followed by another 10 percent and so on so forth.  Finally, a day will come where the losses on each stock would mount to 30 or 40 percent.  This would compel everyone to think, ‘did I commit a blunder by betting on these stocks’?.  When the losses become intolerable, you offload the stocks in a panic.  Panic is the first reaction of investors when you come out of the room with dents all over the mind & body.  Professional advice pours in now from every channel. ‘ Do not sell in panic’ – is something that every discerning investor is aware of. But if we do not sell, the stock falls continuously day in and day out.

Shall I sit on cash?

What if you sell the portfolio on the day when you get convinced that the market is not going up anymore?  Yes, when you sell the entire portfolio and sit on cash, further losses could be arrested.  Say on a portfolio of one lakh, you can assess how much pain you can tolerate—that is 10 percent or 20 percent on the entire portfolio.  Once you get out of the Market and watch from the sidelines—you can see many more Gems going down the drain.  You need not hang on to stocks that are no longer fancied nor loved by the market.  You can take a refreshingly fresh look at other stocks that you were thinking of buying, but could not buy due to their expensive valuation. 

Rebalance your portfolio

Market crashes offer the biggest opportunities to own the real ‘winners’ that have taken a big knock.  Because usually, the most fancied, most loved, and highly over-rated stocks would crash in a big way.  The stocks that you own may not fall in that category unless you are an expert in portfolio management.  So now you have market leaders available at mouth-watering prices.  instead of sitting on lame ducks, you can now own ‘market leaders’ that would rise from the ashes when the market regains its sheen and value. 

Passivity and Inaction

When the Twin Towers were attacked, the first reaction of those guys in the second Tower (the best financial brains in the world, from prestigious Ivey league Universities but well trained, stock market experts) was to get out in a fraction of a second without any second guesses or thoughts.  The Ups and Downs in the Stock Market taught them what to do when the emergency button is pressed.  A market crash is a rare, once-in-a-lifetime kind of opportunity. it offers you a chance to listen to the voice of reason.  Once the emergency button is pressed, you have to keep your cool and rush out before it is too late.  Once you sit on Cash, you are able to marry stocks of your choice—stocks that you could never own because of steeply high valuation—the so-called market leaders leisurely at carefully spaced intervals, observing market movement.  Passivity and inaction would sink your portfolio, denting your fragile heart every second.  Once you stuff the portfolio with market leaders, you can relax and heave a big sigh of relief.  One more advantage in owing market leaders is the fact that they usually do not have filters on the way up, and once the sentiment turns positive, those stocks can rise 10, 20, or 30 percent in a day!!!