Should you wait for a market crash to invest?
The reason many people invest in the market, trade in stock and sell shares is to make a profit. Hence, to make a maximum profit, you want to ensure that you apply the best investment and trading strategies. You hear and read abundant advice stating that you should invest and buy when the market is low, and sell when the market is high.
But what about investing during a market crash? Should you invest when the market crashes? Does this strategy hold any profitable opportunity? The history of the market shows that market crashes are bound to happen.
In a market crash, stocks take a sudden plunge and you have many investment options come at a low price. But, will this strategy give you a high return?
The Strait Times wrote an interesting feature based on this premise. The media house took a look at the records of the last 30 years of Straits Times Index and compared several trading strategies. Out of the eight strategies, one strategy clearly emerged as the winner; this was a strategy of buying after a 20% market correction and selling after a 50% increase from the entry level generated a return of 8.2% per annum.
The media house made two observations:
- Defining the crash threshold too loosely can lead to drawdowns.
- Defining the crash threshold too stringently can lead to you staying out of the market until it is too late.
Investing during a market crash is definitely a viable strategy.
Do not buy without Research
The worst mistake you can make is to buy random stocks during a market crash. With prices plummeting, you want to make each purchase count and reduce the risk of losses as much as possible.
Assess your purchase options.
- Does the stock, investment or company have a chance of recovering after the market crash? A market crash can lead to a company shutting shop, or never really recovering from the economic downturn. You want to avoid any such investments.
- Purchase stock will recover. How do you assess whether a stock will recover from a market crash? A safe investment is government stock and well-established private companies.
Plan for the Long-term
When you invest during a market crash, don’t expect quick returns. It can take your investments as long as 5 to 10 years to recover before they give you a good return or before you can sell it at a profitable price.
Should you wait for the market to crash to invest?
This brings us to the main question at hand. Should you invest when the market crashes? While most experts agree that market crashes are inevitable as it is a way of the market correcting itself, you should not wait for a market crash to invest in it.
- A market crash is not a regular experience. Market crashes do not happen every 5, 10 or 20 years. They happen when a series of factors align together.
- Holding on to your money and waiting for a market crash is a poor financial strategy. You should regularly invest your savings if you wish to increase your savings amount.
- A good financial portfolio includes a mix of low and high-risk investments.
While investing during a market crash can lead to high returns, it is a risky venture. This is strategy recommended only for veteran investors.
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