Why probably not buy stocks in the next market crash?

Time and time again, investors have seen the same scenario. A crisis arises and the shares are selling strongly. Things are looking bad. There doesn’t seem to be any background in sight.

Then suddenly the market begins to recover. It seems too good to be true, as the situation outside the financial markets still looks incomplete at best. However, stocks keep going up and up. Before you know it, a new bull market has started.

That’s what happened so far in 2020, and it’s a playbook that seasoned investors have seen countless times before. However, even with all that experience, many of those seasoned investors didn’t pull the trigger to buy more stocks when the market sank. Many of them are kicking themselves right now, because once again they have missed a golden opportunity to make what could be some of the most lucrative investments of their careers.

Person looking at wall screen with many arrows and charts pointing down.

Image source: Getty Images.

But if you’re mad at yourself for missing the March lows, give yourself a break. There are very good reasons why it is so difficult to buy stocks during market downturns. Here are two of the largest.

1. It always feels different this time

It’s easy to say that the next time the stock market crashes for no apparent reason, you’ll be the first to grab your cash and buy low-priced stocks. But when the accident really does come, the reason behind it always seems to be new. The bearish arguments about what the future will bring seem extremely compelling.

During the financial crisis of 2008 and 2009, there was a very real possibility that the global financial system would collapse. Extraordinary effort was required to keep it afloat. Those who seized the opportunity and invested optimistically were rewarded, but to say it was a sure thing is to let hindsight cloud what it really was during the crisis.

This year, the pandemic has led to unprecedented similar actions, including the suspension of almost all commercial activity for months. Tens of millions are unemployed. A market collapse seemed justified, and the magnitude of the decline reflected concern. Now, risk-tolerant investors have once again identified that things are likely to work and that the decline was overdone. However, there is still no certainty that the pandemic will not worsen, and that has kept many people on the sidelines during the subsequent rally.

If you are going to buy during a market crash, you must be willing to invest when you feel like the worst idea in the world. Don’t expect to build a mindset where you feel comfortable or even eager to shop in accidents. That’s a rarity, and that’s why there are so many really great investors out there.

2. You will settle for nothing less than the perfect moment

Even if you have the discipline to buy stocks when the market falls, the odds of you choosing the absolute fund are almost zero. Most likely, one of the following results:

  • It will identify the bids when the market drops 5% or 10%, and use all of its available cash just in time to see stocks drop another 10% or 20%.
  • You will wait until the market stops falling, and then when the stock prices start to rise, you will not know if you really should pay 5% or 10% more than you would have paid if you had chosen the day the market goes down. to buy. Then the action will increase another 10% or 20% as you sit shaking your head.

One strategy to avoid this problem is to buy partial positions instead of investing all at once. You can invest one part when the market is down 5%, another when it is down 10%, and a larger part when it is down 20% or 25%. Even then, sometimes you will invest all your money before the market bottoms out. But when the market recovers, you will see that some of those positions become profitable early in the rally. You also risk not investing all of your cash at bargain prices if the market doesn’t fall that far, but that at least leaves you with opportunities to capitalize on future recessions.

The best way to continue investing during a market crash

Knowing that these influences are out there is helpful. But even knowing them won’t make it easier to pull the trigger in the next market crash.

Perhaps the easiest way to avoid having to worry too much about investing during shocks is to simply have an automatic investment program. If you take the same amount of money month after month and put it to work in the stock market, you will end up buying more stocks or ETFs in the months that the market has fallen. That will give you an advantage, and if it’s automatic, you won’t even have to think about it.

Taking advantage of market declines is more difficult than it sounds. Instead of responding emotionally, you must find a way to overcome anxiety and make the decisions that seem so obvious when the markets are not under stress. Do whatever it takes to put yourself in that rational state, and you’ll see that your long-term results improve.