Investors have repeatedly seen the same scenario play out. A crisis occurs and stocks sell hard. Things seem bad. There does not seem to be any background in sight.
Then, all of a sudden, the market starts to rebound. This seems too good to be true, because the situation outside the financial markets still seems fragmentary at best. However, stocks continue to rise and rise. Before you know it, a new bull market has started.
This is what has happened so far in 2020, and it is a playbook that experienced investors have seen countless times before. Yet even with all this experience, many of these seasoned investors did not pull the trigger to buy more stocks when the market plunged. Many of them are kicking themselves right now, because again, they missed a golden opportunity to do what could be some of the most lucrative investments of their career.
But if you’re mad at yourself for missing the March lows, cut yourself a bit. There are very good reasons why it is so difficult to buy shares during market crashes. Here are two of the biggest.
1. It’s always different this time
It’s easy to say that the next time the stock market goes down for no apparent reason, you will be the first to take your money and buy stocks cheaply. But when the accident happens, the reason behind it always seems new. The bearish arguments for what the future will bring seem extremely convincing.
During the financial crisis of 2008 and 2009, there was a very real chance that the global financial system would collapse. It took extraordinary efforts to keep it afloat. Those who tried their luck and invested optimistically were rewarded, but to say that it was a sure thing is to allow hindsight to obscure what it really looked like during the crisis.
This year, the pandemic has led to unprecedented actions, including the suspension of almost all commercial activities for months. Tens of millions of people are unemployed. A stock market crash seemed warranted, and the magnitude of the decline reflected the magnitude of the concerns. Now, risk-tolerant investors have again identified that it is likely that things will work out and that the decline has been exaggerated. However, there is still no certainty that the pandemic will not worsen, and this kept many people away during the rally that followed.
If you are going to buy during a stock market crash, you have to be ready to invest when it seems like the worst idea in the world. Do not expect to create a state of mind where you are comfortable or even willing to acquire in the event of an accident. It’s a rarity – and that’s why there are so many great investors out there.
2. You will settle for perfect timing
Even if you have the discipline to buy stocks when the market goes down, the chances of you choosing the absolute bottom are almost zero. What is more likely is one of the following results:
- You will identify good deals when the market is down 5% or 10%, and use all of your available money just in time to see the stocks go down another 10% or 20%.
- You will wait until the market stops falling, then when the stock price starts to rise, you will wonder if you should really pay 5% or 10% more than you would have paid if you had chosen the day the market is down to buy. Then the stock will increase by 10% or 20% while you sit up and shake your head.
One strategy to avoid this problem is to buy partial positions rather than invest all at once. You can invest part when the market drops by 5%, another when it drops by 10% and a larger part when it drops by 20% or 25%. Even then, you will sometimes invest all of your money before the market reaches bottom. But when the market recovers, you will see some of these positions becoming profitable at the start of the rally. You also run the risk of not investing all your money at bargain prices if the market turns out not to fall as far, but this at least leaves you with opportunities to capitalize on future declines.
The best way to continue investing during a stock market crash
It is useful to know that these influences exist. But even knowing them, it won’t be easier to pull the trigger during the next stock market crash.
Perhaps the easiest way to avoid worrying too much about investing in a crash is simply to have an automatic investment program. If you take the same amount of money month after month and market it, you will end up buying more stocks or AND F in the months when the market fell. This will give you an advantage – and if it’s automatic, you won’t even have to think about it.
Take advantage of market crashes is more difficult than it seems. Rather than responding emotionally, you need to find a way to overcome the anxiety and make choices that seem so obvious when the markets are not under stress. Do whatever it takes to get yourself into this rational state and you will see your long-term results improve.