The stock markets in India have been in the throngs of super highs and record lows for the better part of 2022. Rising inflation, the Russia–Ukraine war, and high crude oil prices have brought the S&P 500 into a bear market.
This extreme volatility is the very nature of any stock market – bear and bull market, price corrections are part of this virtuous cycle. It can even lead to a stock market crash.
History shows how long it takes to recover from stock market losses. That’s because it does not come with a calendar announcement.
So, if you are one of the unlucky few to have lost money in the stock market, then this is what you must do next.
1. Evaluate Your Loss
When the stock is about to crash, you have probably gone into panic mode. It is natural to feel that way.
You put in a lot of time and effort to build your portfolio, only to see most of its value disappear in days or weeks. That said, it isn’t the ideal time to fall apart. Instead, you can use this time to assess your portfolio.
See which of your investments worked in your favour and the ones that went on a freefall. Then, as you rebuild your assets over the next few months and years, you will know which stocks to put your money in and which to avoid.
Even if you have lost money in stocks, there is no better time than now to assess your long-term goals. Perhaps you want to diversify more and choose low-risk or risk-averse assets that offer steady returns.
2. Rebalance Your Portfolio
When you lose money in the stock market, it is time to rebalance your portfolio once again. It helps to minimise the overall risk whilst enabling you to reap risk-adjusted returns on your investments.
Start with an asset allocation strategy by taking stock of your current investments in the face of a market crash.
Be aware of where you invest, the total value of investments, your long-term financial goals and the parameters you should focus on to build your investment portfolio.
Get a target allocation in place for all the different asset classes. First, it can help you understand your current financial situation. Then, based on your finances, you can select investments you need to buy or sell to achieve your target allocation.
This course of action will help you rebalance your portfolio and keep you on the right path to achieving your financial goals.
3. Be Ready to Buy When the Market Dips
A market crash is also a great time to get your hands on some extraordinary dividend or return-paying stocks at a discount. The idea is not to panic-buy anything to recover your losses. Instead, you must evaluate which stocks align with your financial goals and pick them when the prices drop.
Buying on a dip is possible if you are willing to commit cash at a time when you are already taking on a significant loss. If you buy as the stock is falling, you may not get it at its lowest, but at a discounted price, it will be.
Think of the stock’s long-term potential when you consider these opportunistic investments.
4. Focus on Making Long-Term Investments
When the stock market is in a freefall, you may ask yourself if it will hit ground zero. Will the economy ever recover, and the stock prices once again reach their defined targets.
Everyone knows the answer to these questions, but you tend to second guess everything when you have lost money in stock markets. Of course, short-term volatility will exist when you invest in the stock markets. But you can be the sole architect of how the volatility impacts you.
These short-term highs and lows will not affect those in the game for long-term gains. So instead, you should focus on discipline in your investing approach without worrying too much about short-term market movements.
5. Liquidate If You Have To
Everyone’s situation is not the same. If you are young and without too many financial obligations, you may have the luxury of riding out the market crash. Your risk appetite may be high enough to absorb the lost money in stocks.
For those closer to the second innings of their life, taking the option to wait it out may not be possible at all. Even if the market rebounds, they may not have enough to reinvest as their work-life may be over by then.
Therefore, you must always have an exit plan depending on the situation. If liquidation is the only option, then be brave enough to take it.
Final Thoughts
Stock market crashes can be disheartening. That said, keeping calm and making the right decision is vital. You can use it as an opportunity and recover from stock market losses in time.
And always remember that the stock market works in cycles. If it is rock bottom today, it will also rise in the foreseeable future. So the best thing you can do is watch the movements and stick it out for the long term.
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