Consider buying the dip
Market dips can also be a buying opportunity. Think of it as buying stocks on sale when the market crashes. The trick is to be ready for the fall and willing to commit some cash to snap up investments whose prices are dropping.
Most professional traders move to cash or cash equivalents when there is real turbulence in the markets. Keep at least a small portion of your portfolio in guaranteed investments that won't fall with the markets.
However, several options tend to perform well or offer protection during market downturns. U.S. Treasury securities, particularly long-term bonds, are often considered a safe haven during crashes because of their government backing and tendency to rise in value when stocks fall.
Buy More Stocks, if you can
We all know the thumb rule of the stock market, buy low and sell high. In the case of a stock market crash, you can buy more short-term and long-term stocks that will book profits when the market is up again. But are you going to buy the stocks blindly because they are at a low price?
Stock price drops reflect changes in perceived value, not actual money disappearing. Market value losses aren't redistributed but represent a decrease in market capitalization.
Stocks and bonds have relatively low transaction costs, allow you to diversify more easily and leave your cash more liquid than real estate (although the stock market is typically more volatile than the housing market). Meanwhile, real estate is a hedge against inflation and has tax advantages.
What are the best investments during a stock market? Some investments that may provide positive returns during a stock market crash can include safe-havens such as gold and the US dollar. Companies related to consumer staples also tend to rise in value, such as utility, food or pharmaceutical stocks.
Key Takeaways. While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.
What Happens to My 401(k) If the Stock Market Crashes? If you are invested in stocks, those holdings will likely see their value fall. But if you have several years until you need your retirement account money, keep contributing, as you may be able to buy many stocks on sale.
The S&P 500 took almost six years to fully recover from the crashes of 2000 (the dot-com bubble) and 2008 (the global financial crisis).
Seek Out Core Sector Stocks
If you want to insulate yourself during a recession partly with stocks, consider investing in the healthcare, utilities and consumer goods sectors. People are still going to spend money on medical care, household items, electricity and food, regardless of the state of the economy.
Do you owe money if a stock goes negative? No, you will not owe money on a stock unless you are using leverage, such as shorts, margin trading, etc., to trade.
Take a short-selling position. Going short in bearish times is one of the most common bear market strategies among traders. As a trader, you'll short-sell when you expect a market's price will fall. If you predict this correctly and the market you're trading on does decline in value, you'll make a profit.
The average recovery period for major U.S. market crashes is about two years, though some have taken longer. For instance, after the 1929 crash, it took 25 years for the Dow to reclaim its previous high. Meanwhile, markets recovered from the 2020 COVID-19 crash in just five months.
Money Market Funds
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.
Bonds usually go up in value when the stock market crashes, but not all the time. The bonds that do best in a market crash are government bonds such as U.S. Treasuries.
What Are the Biggest Risks to Avoid During a Recession? Many types of financial risks are heightened in a recession. This means that you're better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.
“The demand for travel and hospitality services typically declines as consumers cut back on discretionary spending,” Sarib Rehman, CEO of Flipcost, said. “To attract customers, airlines, hotels and travel agencies often lower their prices and offer more promotions.”
If the market were to crash, would that make it easier to buy a home? It's possible, but it depends on what caused the crash in the first place. If it's anything like the last crash, where many workers lost their jobs, taking advantage of lower home prices won't be possible for many homebuyers.
“While it can be tempting to withdraw all your funds from a bank and keep them at home, banks are typically more secure and offer protection against theft or loss. Plus, keeping money in a bank allows for easier access to funds if needed for emergency expenses or unexpected bills.”
Having a diversified 401(k) of mutual funds or exchange-traded funds (ETFs) that invest in stocks, bonds and even cash can help protect your retirement savings in the event of an economic downturn. How much you choose to allocate to different investments depends in part on how close you are to retirement.