China's stock crash cost investors billions of dollars. It would be wise therefore to be prepared for the worst and avoid being one of the many investors who'll lose some of their money in case there's a crash. A sound trading strategy would help investors minimize their losses. Question: is the best action doing nothing and waiting "for the storm to pass" [so to say]? Or would this prove to be more costly in the long run?
The best thing you can do IMO is be prepared ahead of time by not being overly concentrated and not exposing yourself to too much risk on any given day. Don't be one of those people who has everything in 1-2 stocks or even 1-2 industries, sectors, or regions. If you're long-only and have all of your money in stocks (as opposed to having at least a little in bonds, commodities, paper real estate, etc), don't be levered up too much. In fact, I would suggest always having at least a little cash on hand. I learned a long time ago to always ask myself what could be the worst possible scenario if I made a particular move BEFORE I made it. All of that aside, if we find ourselves in a situation where the market takes a huge dump in a very short period, the best thing to do is not panic. The typical small retail investor should stay focused on the long term. Hopefully you're dollar cost averaging into your account every payday, and can use market dips to your advantage by buying more of your investments when they are cheap. I personally start buying lightly into companies that are suddenly cheaper than they were before the crash, as well as add to at least some of my existing investments that have also likely become cheaper. I'll probably use this as an opportunity to cash in on at least some puts/shorts that have hopefully given me some good returns on the downside. I'll likely buy more put options in the event the market keeps going down. And I may also use this opportunity to take at least a little profits off the table on any of the more volatile, hi-beta, overvalued "growth" long stock positions I've had that I've ended up with significant upside in even after the crash. If the market continues to drop, I may end up losing significant previously earned upside on the more volatile companies I've owned going into the crash. Those high-beta companies and industries often go down quite a bit more than the overall market when things get ugly. These are the types of companies I'm buying puts on normally, and buying more puts on when the market gets shaken up.
A few random things that have gotten me through the nastier times: Have cash set aside for when things really go south. Both to protect yourself, but also for buying opportunities. Be realistic about your risk tolerance. It is easy to talk yourself into some that is outside of said. Diversity. Make sure your portfolio is properly diversified. Don't let emotion take over. I grant, this is easier said than done, but looking for the long term has to be the goal. If you can, buy when investments are cheap and profit as the market improves. For example, as bad as the bloodbath was in 2008, it was a great time to invest. Have at least a little bit of your investments in gold and silver. Ride it out. Nothing—good, bad, or indifferent—lasts forever and that includes the markets. Cheers.
From what I have heard from my nephew who is a stock broker, a crash will not have lasting effects on the blue chips. That is the reason why he is advising me to hold on to the stocks of our company - it is the shares of stock granted to senior officers. Hopefully it will not happen but when the Philippine stock exchange suffers a crash, I have to wait until the smoke clears and probably the value of my stocks will come back in some months or up to a year of waiting. Just don't sell at the very low prices.
I definitely don't have enough money for this (yet), but I'd definitely cash out at the first signs and wait for the buying opportunities. I want to invest heavily in real estate later in life, therefore that's the right strategy for me, I think. I do admit I don't have a high risk tolerance, though, reason why I feel safe with a roof over my head. Real estate, respectively rental properties, will always bring a good cash flow, even though the value of those property will fluctuate heavily.
Well as the others have said, proper diversification is the key. I also like to invest the majority of my money into strong and stable companies... especially those that I judge to be able to weather the storm. Companies that will survive, and even prosper in bad economic conditions. Sure the stock price of these companies also falls down with the general market but usually not as much. And that's usually just a buying opportunity since they are ones that will make a profit even in bad times. Also it's useful to have cash or a margin account ready so you can buy when the prices are low. You only really need either cash or a margin account but having both doesn't hurt... the point is to have a way to buy more when the prices are low and everyone else is panicking.
One question for the more experienced traders here: people say they lose a lot of money whenever their stocks crash...but only if they choose to sell those stocks in their lowest point, at a lower price than they had bought them. Most of the blue chip stocks tend to gain back everything (of course, not in the same time frame), therefore why are people complaining about this?
Behavioral finance is certainly interesting. Fear, greed, and ego control many people. And these people tend to have a hard time investing their own money. Personally, I tend to invest more in good companies that are trading at a relatively cheap price when they become even cheaper due to a systemic market pullback. As long as the drop in price of a security is due to broad market factors, and not due to any negative fundamental change within that company (or perhaps its entire industry) itself, it's usually a good opportunity to buy more. The companies that tend to scare me during tough times are the more speculative, high-beta, high multiple "growth" stocks that often earn little or nothing. These are the stocks I tend to keep put options on when I'm long on them, and these are usually the first stocks I tend to get away from on the long side when things start to get ugly.
Also take notice that it's often not people saying "I lost this much" but it's the media saying "this celebrity/businessman/athlete/other dude you know lost THIS much in one week". And what they mean is the unrealised losses. It's just a much better click bait for the media when it's "lost this much" instead of "his investments went down last week along with the rest of the market". And no one chooses to sell anything at the lowest point. If you sell something then you personally believe that this particular equity will keep on sliding down. And you either move your money into something else or wait for the downfall to stop. Those unfortunate people who really sold for the lowest price... well that's a mix of bad luck and bad insight into the market.
You can also use put options if you're confident the market is going to drop a lot. That way, you can still make money from a sell off without as much money at risk. I would hold all of my stocks unless they were at risk of going under. I hate how people say they 'lost' money when the value of their investment went down. It's an investment and you don't have any money until you trade it for money.
