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I genuinely sympathize with investors who find themselves tossing and turning at night, haunted by the spectre of a stock market crash.
Let’s face it: when your portfolio’s value hits the coveted six-figure mark, even a seemingly modest 1% intra-day swing can translate to thousands of dollars in unrealized losses. That sinking sensation of watching your hard-earned money dissipate, even if just on paper, is a sentiment many can resonate with.
History reminds us that market crashes are an inevitable part of the financial landscape. The ghosts of Black Monday in 1987, the unforgiving burst of the 2000 Dot Com Bubble, the relentless tremors of the 2008 Great Financial Crisis, and the unexpected jolt of the 2020 COVID-19 crash serve as stark reminders.
These events underline an undeniable truth: markets will, from time to time, face downturns. Yet, amid this roller coaster of highs and lows, the power truly lies in our hands. Our reaction and our ability to moderate our responses and steer clear of panicky pitfalls can make all the difference.
So, before you find yourself overwhelmed by the next market dip, let’s explore the three cardinal mistakes to avoid, ensuring you not only weather the storm but also sail through it with strength and resilience.
Mistake #1: Blindly buying the dip
You’ve probably heard the battle cry of seasoned investors when the market goes south: “Buy the dip!” While this strategy can sometimes feel empowering, especially when imagining a triumphant rebound, it can also be deceptively dangerous.
The truth is, during a broad market panic, even the sturdiest, most fundamentally sound stocks might take a nosedive. But this doesn’t necessarily mean they’re all bargains ripe for the picking. Here’s the crux of the matter: Not every stock that plunges during a crash is merely suffering from market hysteria.
In some cases, a stock’s performance might genuinely mirror underlying issues or going concerns that aren’t immediately evident to the average investor. Rushing in to double down without due diligence is akin to trying to catch a falling knife; it’s not just risky — it can be downright harmful.
Now, there’s an exception worth noting here: if you’re putting your money into globally diversified, broad market ETFs like the Vanguard All-Equity ETF (TSX:VEQT). Such funds spread their risk across a vast array of companies and sectors, giving you a safety net that individual stocks might not offer. But for other, more specific investments, caution is the name of the game.
Mistake #2: Panic selling and going to cash
When the stock market gets rocky, it’s tempting to run to the perceived safety of cash-like investments such as Purpose High Interest Savings ETF (TSX:PSA). It feels secure, tangible, and safe from volatility. But in the grand theatre of investing, making a hasty exit can often mean missing the next act.
By rushing to cash during downturns, you risk missing out on potential market recoveries. These rebounds can be as unpredictable as the crashes, and being on the sidelines can mean missing sizable gains. Moreover, when you sell out of fear, you solidify any losses, turning paper deficits into actual ones.
But it’s not just about potential missed opportunities. While cash might feel like a safe haven, it doesn’t grow. Over time, the value of that cash can be chipped away by inflation, silently eroding its purchasing power. You may end up with less than if you just held firm.
Mistake #3: Overreacting to media sensationalism
In today’s hyperconnected age, news travels at the speed of light. Every dip, spike, and hiccup in the market is often met with a barrage of headlines, each more dramatic than the last. For example, “Market in Freefall!” And “Is This the End of Investing As We Know It?”
Overreacting to media sensationalism is a trap many fall into. It’s easy to get swept up in the tide of dire predictions and foreboding analyses. But here’s the thing: while staying informed is vital, it’s equally important to differentiate between insightful analysis and clickbait designed to stoke fears.
Making investment decisions based on alarming headlines can lead to erratic strategies. The media’s job is to report and, yes, sometimes to sensationalize to grab attention. Your job, as an investor, is to sift through the noise and make decisions based on sound research and long-term goals.
So, the next time the headlines scream of impending doom, take a step back. Breathe. Consult trusted financial sources and advisors. Remember that the stock market has weathered countless storms before, and with a clear head and a steady hand, so can you.
