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Few things disrupt global markets quite like a global pandemic, and this has proven to be the case as COVID-19 continues to spark concern and dominate headlines.
The FTSE 100 dropped significantly in February and March, and hundreds of billions of pounds have been wiped from the value of the companies on the London Stock Exchange.
Global stock markets have suffered their biggest drops since the Great Depression, and investors the world over are braced for further uncertainty (and further losses).
But is now a good time to buy stocks? We explain what you should do when the stock market crashes, especially in the case of a global crisis.
Coronavirus case study
Depending on who you listen to, coronavirus is either much ado about nothing or one of the greatest existential threats that humanity has ever faced. As is often the case, the truth probably lies somewhere in the middle, but it’s extremely likely that the global economy, including the stock market, will continue to be affected for months to come.
This means it could be a good time to rebalance your portfolio while keeping an eye out for any potential opportunities in the market.
What stocks should I keep an eye on?
Travel and tourism stocks have been some of the most affected by the pandemic. easyJet and Wizz shares were hit hard, with both suffering double-digit percentage losses. But big corrections can also represent big buying opportunities, especially if a company’s fundamentals remain solid.
Before the crash, easyJet’s share price had almost doubled over the previous six months and if you believe the business is still on the right trajectory, now could be a good time to buy.
Here are some stocks to watch during the coronavirus scare:
How to invest after a stock crash
When markets crash, it can be tempting to sell your shares in an attempt to avoid further losses. But this is not necessarily the best strategy, especially if you hesitate on pulling the trigger.
Stock market downturns are a reality and must be considered alongside the record gains of recent years. It’s often a better idea to ride out the volatility rather than try to time the market, according to Danny Cox, head of communications at Hargreaves Lansdown.
Market volatility is part and parcel of investing and its important investors don’t rush to make decisions in haste that they regret later. In the vast majority of cases investors are better sticking with it, as the markets will recover.”
Know your strategy
Your best course of action in the event of a crash will depend on your trading strategy and overall investment goals, according to Michael McCarthy, chief market strategist for share-trading platform CMC Markets, who spoke to Finder. “In most cases, investors should be reviewing closely and working out what a 10% drop or a 20% drop would mean to their holding. Whereas somebody who’s taking a more active approach might start weeding their portfolio.”
It’s important to know what your goals are and whether a crash has impacted your ability to achieve those goals. It is possible that a crash gives you some good reasons to sell.
Be prepared to buy the dip
When markets dip, you can make money. The key thing is to be ready for this to happen and to have the funds to snap up shares when the prices are low.
Timing the market is incredibly hard and you’re very unlikely to get the stock at its absolute lowest, but as with all investments if your intention is to hold for the long term, then it can be a good opportunity to snap it up at a lower cost.
One way to prepare if you’re an active investor is to keep a list of stocks that you would be willing to buy if a crash happens.
Seek financial advice
When stocks are crashing it is easy to get swept up by your emotions. If 20% of your portfolio value has been knocked off, you might not be in the right frame of mind to be making decisions which could impact your financial future.
Seeking a second opinion, ideally from a financial adviser, can give you some perspective to your thinking and guard against any rash decisions.
What happens after a crash?
Following a market crash, stocks are likely to experience a period of volatility as investors reevaluate the market. But downturns can also represent investment opportunities, especially if there are certain stocks you think may have switched from overvalued to undervalued.
Cautious investors may often flock to “safe haven” investments like gold, bonds or even bitcoin, so a market downturn may be a good time to think about diversifying your investment portfolio.
If history is any indicator, the markets should eventually rebound, but trying to determine when this will happen is the million-pound question. Stocks may recover within weeks or months, or we may be faced with a years-long bear market, especially if global recession fears turn out to be on the money.
When will stock markets recover?
Unfortunately, it’s impossible to know for certain how long the market downturn will last as we’ve never encountered a situation like this before. Below are a list of some of the more popular suggestions given by analysts as to when we might see the market start to recover:
- New global COVID-19 infection rates start slowing
- Coordinated action from global governments to cull the outbreak
- It becomes clear a credit squeeze isn’t on the cards
- Oil prices come under control and OPEC members agree on output
- The pandemic comes under control
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