So, you’re an investor and you suddenly see that al the stocks are crashing down. You knew it was going to happen. But what should you do now?! Total panic? Stay calm? And what about my investments? Sell them all? Or do nothing? In this video I am going to tell you what you should do.
00:00 The stimulus check…
The stock market crashing and the stimulus check is the reason why there crashing. The one point nine trillion dollars that president Biden signed for the other week was to much for the stock market. So what now?
02:07 Step 1: Remain Calm
This one cannot be stressed enough. In the hours and days immediately following a stock market crash, this effectively translates to “do nothing.” Watching your investment account values plummet can trigger some deeply emotional reactions, but if you’re an investor, you know that emotion shouldn’t play a significant role in investing. Panic can completely poison an otherwise well-constructed plan. It’s basically impossible to act with robot-like precision, but do your best to set some rational goals and stick to them. So how should you do it then?
03:57 Step 2: Take inventory of your other assets
When one asset class is experiencing an extreme event, it’s a great time to check up on other elements of your financial plan. Most people own some combination of real estate, maybe some bonds, or even a business or even insurance policies with cash values. These other assets may be performing in completely different ways compared to your stock portfolio. Make sure you have enough liquidity to meet your household financial obligations without selling your temporarily depleted stock holdings.
06:02 Step 3: Rebalance and Reallocate
After a stock market crash has happened, the likelihood that stocks will move drastically lower is reduced, and the amount that they can decline should also shrink. Over the long term, stock valuations always come closer to reflecting the profits and dividends produced by the underlying business. In a bear market, shareholders can gain exposure to those profits and dividends at better prices. Once a crash occurs, the balance of risk shifts. The downside potential is limited, while opportunity cost rises. Opportunity cost is the loss you incur by failing to achieve appreciation with an investment the more growth you could hypothetically achieve, the higher the opportunity cost.
07:07 Step 4: Harvest tax losses if applicable
This doesn’t apply to everyone, but tax-loss harvesting is an important part of improving net returns for many people. Tax-loss harvesting involves reducing taxable gains by selling holdings that have negative returns, then replacing them with similar holdings that will grow in the future. For example, you could sell an index-tracking ETF at a loss, then use those proceeds to purchase another fund that tracks the exact same index. That creates a loss for the current tax year that you can use to reduce your net gains, thereby limiting the check that you owe to the IRS without changing your growth outlook. That obviously reduces your cost basis for taxation on future gains, and trading will incur some additional expenses above the cost of simply holding the initial investment. Make sure that you’ll actually benefit from harvesting those tax losses before you go ahead and complicate the situation. This is just the surface benefit that you could get on taxes.