On Monday, August 5, 2024, stock markets worldwide experienced one of their worst selloffs since 2022. The selloff was triggered by fears that the US may be headed into a recession after disappointing jobs numbers on Friday, August 2, 2024.
Stock Markets Crash
On Monday, the Dow fell 2.6% or 1,033.99 points to 38,703.27. The S&P 500 fell 3% to close at 5,186.33, while the Nasdaq fell 3.43% to 16,200.08. The Dow and S&P 500 registered their biggest single-day loss since September 2022. The Nikkei 225 saw the worst performance since Black Monday 1987, leading to fears of a global recession.
The crypto market was not spared either, as investors rushed out of speculative assets in safe harbor assets like bonds. Over the past week, the price of Bitcoin (BTC) is down 17.73% to around $54,844.38 per coin.
According to the July jobs report, the US economy added 114,000 jobs, well below the 12-month average of 215,000. The outlook thus far remains uncertain. However, there are still strategies that investors can adopt to protect themselves.
Here is a look at protecting your portfolio during these uncertain times.
Understanding A Stock Market Crash
The stock market is naturally cyclic. Around every ten years, it experiences a massive correction, with prices dipping up to 50%. Depending on each drop’s size, it can take up to four years or more to recover. For instance, during the dot.com bubble, the stock market took over four years to bottom.
That said, the recovery cycle has been much faster. For instance, the FTSE 100 took less than two years to recover from its pandemic losses. Additionally, it recovered from the 2016 dip in less than a year.
Should You Sell Or Buy?
One common mantra among investors is to buy the dip. However, knowing how to time the dip can be difficult. A great investment strategy for those caught up in the bear market is to hold their assets.
Looking at past stock market crashes, there was usually a recovery within the next 12 months. While investors are unlikely to regain all their losses in that period, it can lessen their overall losses. Consequently, cutting losses by selling is not an advisable strategy.
A good example is the 2009 financial crisis when the FTSE 100 fell 49% but regained 64% in the next 12 months. While investors still experienced some losses, it was less than the losses they would have suffered by selling immediately.
Another example of this trend is the 2020 pandemic, when the FTSE 100 fell 37% but recovered 22% in the next 12 months.
A long-term view is advisable instead of trying to beat the market.
Tips To Avoid Further Losses in A Market Crash
The Fed has said it could cut interest rates if inflation numbers are promising. However, if inflation comes in hotter than expected, it could mean interest rates are held at their current level. Such a scenario could cause the markets to fall even lower. There is also the risk of the Ukrainian war and tensions in the Middle East. Some useful tips to protect yourself are:
Diversify Into Different Sectors
One option for diversifying your portfolio is to invest in investment trusts. To reduce volatility, you should look for funds that diversify in different countries and sectors.
Diversify Into Different Asset Classes
When diversifying your portfolio asset classes, ensure that you avoid those that have a strong correlation. For instance, you can invest in equity-based assets like bonds or commodities.
Pick The Perfect Timing
Choosing the perfect entry point is as crucial as the type of asset you pick. One strategy you can adopt is dollar cost averaging to reduce the risk to your portfolio.
Consider short Selling
With stock markets plunging, one great strategy you can use to make money is to short-sell. While it is not a foolproof method of profitability, you can still research which stocks are likely to keep falling and short them.
It Still Possible To Make Money in a Recession
Even during the worst stock market crash, there are still opportunities for potential profits. In a recent report by Goldman Sachs, they predict the likelihood of a recession to be 25% in the next 12 months, up from their previous forecast of 15%. The report was co-authored by economist Jan Hatzius, who has won numerous awards for correctly predicting the 2008 financial crisis.
As such, investors must prepare for all possible outcomes based on the tips above.
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