If you have only invested in the market in the last decade or so, you would not have been caught in a market crash, and have probably never considered what you would do if one were to occur.
You may now be seeking to control your own financial destiny by building a share-portfolio, perhaps for a retirement nest-egg. In this case, you should not delay thinking about what you would do in the event of a market crash, or risk losing more of your savings than necessary.
You alone must work out a strategy that meets your own needs. Below are a few issues you may wish to consider in doing so:
- Should you increase your cash reserves when there is evidence of irrational bullish exuberance in the market?
- Rather than wait and see, should you make it a policy to sell when there are technical patterns suggestive of uptrend reversal?
- Will you set stop/loss positions for your longer-terms investments, as well as your trades, and how close will you set them?
- When and how can you distinguish between temporary pull-backs of the order of 10-15%, from more serious market crashes, possibly of the order of 30-40%, that may take years for recovery?
- If you have missed a stop/loss position, is it better to still sell or continue to hold, waiting-out the downturn until the market recovers?
- If you have suffered substantial losses, is it better to exit the market altogether, and seek more stable investments elsewhere?
In my investment lifetime I have experienced two severe market crashes in 1987, and in 2008, so have given much thought to these questions.
I will refrain from offering my own viewpoints, and will simply invite readers to come to their own conclusions after due consideration, and to formulate their own policies.