Last Updated April 7, 2020
I noticed recently the stock market suddenly dropped unexpectedly—and just like that I “lost” thousands of dollars on my investments. But sometimes a stock market crash can be an excellent way to make money. Find out what to do when stocks go down. Want a FREE stock? Click HERE to sign up for Robinhood.
What Is A Stock Market Crash?
A stock market crash is when the value of stocks suddenly drops in a short period of time. To get an idea of if the value of stocks has dropped, we look at the market indexes—such as the Dow Jones Industrial Average, the S&P 500, and the Nasdaq. An abrupt drop of 10% or more in the stock index over the course of a few days is usually considered a stock market crash.
What Causes A Stock Market Crash?
There can be many things that cause a stock market crash. But historically, stock market crashes have been due to at least one of the following reasons:
- A major catastrophic event (like the pandemic of the COVID-19 coronavirus).
- Economic crisis (like the subprime mortgage crisis in the US).
- Bursting of an economic bubble (like the dot com or real estate bubble).
- Public panic and people selling off their stocks.
Is The Stock Market Going To Crash In 2020?
The stock market has already crashed in 2020. The stock market crash of 2020 began in March due to global fears about the spread of the coronavirus. Investors were worried about the impact of the coronavirus on their financial future.
So the question really is “is the stock market going to crash even further in 2020?” Well, according to investment bank giant Goldman Sachs, they think we have further to go until we reach the bottom. They think that the S&P 500 could go down another 20% from current levels and 41% from its all-time high.
How Long Does A Stock Market Crash Last?
Forbes looked at the history of the S&P 500 since its inception and identified all instances when the market fell more than 20% below a prior all-time high (which is the agreed definition of a bear market).
They found the average time until recovery was 645 days. The shortest time was 212 days, and the longest 2,423 days.
How Long Will The Stock Market Crash Of 2020 Last?
If the Forbes numbers are taken at face value, these numbers suggest that investors may not recover their losses before October 2020 at the earliest, or as late as sometime in 2026.
However, this current bear market took just 22 days to arrive—which is significantly faster than any other bear market in history. As you can see from the chart above, anything close took at least 55 days to arrive. Therefore, it’s possible that the recovery can be swift as well.
What To Do When Stocks Go Down?
We recently had the worst day for the Dow since the correction in February 2018. A correction is defined as a drop of at least 10% or more for an index or stock from its recent high.
I know it can be scary when the stock market crashes and drops so rapidly. It definitely makes you feel like “I need to sell everything!” or “I should probably sell now and cut my losses before I lose even MORE.”
And sometimes it could be best to sell. However, before you go on a selling frenzy, do an analysis to determine if this is likely a short-term decline or if it’s REALLY time to sell.
So let’s go over what you should do when stocks go down.
Should You Sell During A Stock Market Crash?
Before you decide to sell any stocks during a stock market crash, you need to evaluate if this is likely a short-term drop or if it’s REALLY time to sell. When determining if this is a short-term decline, ask yourself “will this decline affect earnings or growth of the company in the long-term?”
If it is just a short-term drop, you may want to buy stocks during the dip and hold them as a long-term investment.
If it looks like this decline will continue to trend downward well into the future, then I would get out while I still can. To learn more, this article from U.S. News discusses when you should buy stocks on the dip.
For me, the recent “loss” made me nervous, but I concluded there is no reason to panic and sell. This recent dip in the stock market wasn’t really an issue for me because my plan is to invest for the long-term.
Most of the companies I invest in I feel are high quality and will have growth in the future. Therefore, I decided not to sell.
Should You Buy Stocks When The Market Is Down?
A lot of people see great opportunity to buy more stocks when the market is down. However, I don’t recommend buying a stock just because it is “cheap” or on “sale” right now. You still have to decide if the stock is worth the lower price it’s trading at.
For example, if a stock was trading at $100 a share, and is now trading at $90 a share, it is natural to think $90 is a bargain price for that stock because $100 was the right price. But what if the stock never deserved to trade that high?
To determine the actual value of stocks, you need to look at a company’s revenues, assets, or profits. Without earnings and assets to back up the stock price, a stock will eventually continue to fall.
This article from The Motley Fool is a good place to start if you want to learn more about how to value a stock.
How Do You Make Money When Stocks Go Down?
If you are a long-term investor like myself, I feel like a stock market decline is often a good time to buy stock in high-quality companies at a good price. When the stock market goes down, you can make money in two ways:
- If you already have dividend-paying stocks, the reinvested dividends will buy more stock. Thus, increasing the percentage of the company you own.
- You can buy more stock at a cheaper price.
If you’re truly focused on the long-term game, the short-term losses are less significant. When you buy stock in solid companies, over time you will make money on your investment.
I personally use Robinhood.com to purchase individual stocks. I like this website and app because you can buy and sell stocks for FREE—there are no commissions or fees. Most other brokerage firms charge at least a $4.95 fee per trade, and some have hidden fees.
Sign up today with my link, and you and I can get a free stock like Apple, Ford, or Sprint. With Robinhood you also don’t need a minimum account balance, so you can get started right away.
How Do You Prepare For A Recession?
With the stock market crash of 2020, people are afraid that we may be entering recession territory. A recession is a period of economic decline, usually lasting for six months or longer.
So, how do you prepare if you think another recession is coming? Here are a few things you can do to prepare for a recession:
- Make an “Emergency” Budget that is leaner than your regular budget. This budget should give you an idea of how much money you would need to cover only your bare necessities.
- Build up your emergency fund.
- Get rid of any high-interest debt
- Establish other streams of income like a side hustle or investment income.
- Make sure you have a balanced portfolio. You don’t want to own too much of one thing. By having a balanced diversified portfolio, you protect yourself more from the volatility of the stock market.
If you want to learn more about how to survive a recession, you can read my detailed article “7 Things To Do If You Think Another Recession Is Coming.”
In short, you should look at a drop in the stock market as a potential to buy some stocks in high-quality companies. Do some research and make sure the price you’re paying is an actual bargain.
Also, don’t panic and sell everything. Do an analysis first to determine if this is likely just a short-term decline, or if the company’s value will continue to fall. Then, and only then, should you make your decision to sell or hold.
Finally, you can track how your stocks are doing with a FREE Stock Investment Tracker that can be found in my Resource Library. Now you will know what to do when stocks go down next time!
- Best Ways To Invest In The Stock Market For Beginners
- Stock Market Basics: 3 Simple Long Term Stock Investment Strategies
- Best Ways To Start Investing For Beginners: Investing 101
If you want to remember this article, pin it to your favorite Pinterest board.