Stock market crashes don’t happen all that often, but when they do they cause a great deal of financial distress. Crashes can wipe out investment accounts, making it harder for people to retire or save money.
However, stock market crashes don’t only represent losses. There is an opportunity when values dip – you just need to know how to take advantage of it (beyond shorting stocks you think are heading to the ground, that is). Read on to learn about some ways you can leverage the next stock market crash to boost your returns.
Diversify Before the Next Stock Market Crash
To weather any sort of dip in value, you should make sure that your portfolio is diversified. Being invested heavily in the financial sector, for example, would have wiped out a ton of value in 2008.
You should always have a few “evergreen” stocks that are unlikely to see changes in their business despite an economic downturn. This includes things like alcohol companies, established retailers with international presences, and other low-risk, low-growth stocks. While you’ll still need to rebalance eventually, this can help minimize losses.
Dollar-Cost Averaging
Dollar-cost averaging is an investment method that lets you maximize your investment, and it can pay off huge during crashes. With this strategy, you choose to invest a specific amount of money at regular intervals. This means that instead of buying 1,000 stocks at $30 each for $30,000 total, you invest $10,000 every four months for a year.
As stock prices dip up and down, you’ll buy at different prices and receive different amounts of stock. If in the first four months the stock price was $30, and the next saw it dip down to $20, and then rise again to $35, you’ll be ahead of where you would be if you had invested all at once.
Look at the math below:
$10,000 first four months at $30 a share = 333.3 shares
$10,000 second four months at $20 a share = 500 shares
$10,000 third four months at $35 a share = 285.7 shares
This leaves you with a total of 1,119 shares instead of 1,000, a difference of $4,165 at $35 a share! While a crash will likely last more than a year before recovery, it’s still a good example of how regular contributions can grow your wealth.
Reinvest Your Dividends
Another important point to make is that the example above does not include dividends. Having a diverse portfolio with some stable, reliable-yield stocks lets you boost your regular purchases and compound your growth. You can
Dividends can also help you withstand short-term dips in value during a crash, maintaining the overall value of your portfolio.
Borrow Against Your Portfolio if You Need To
If you need to access funds in the short term to take advantage of the next stock market crash, you may want to consider getting a stock loan, where you pledge your stock as security for the loan. This lets you access capital, and then pay back the loan to get your securities back (with an increase in value that may come with it). For more information about this unique financial vehicle, feel free to get in touch with us!
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