What to Buy When the Stock Market Crashes
On Monday, March 16, the Dow Jones came crashing down nearly 3,000 points. That’s a loss of nearly 13%. So many people are now wondering what to buy when the stock market crashes.
In fact, people may be wondering whether they should buy at all when the stock market crashes. Or is investing too dangerous?
Here’s the true answer: It depends. It depends on who you are. How soon you need the money. And how much appetite you have for risk. Before we get into that, let’s understand why the stock market just crashed.
Why Did the Stock Market Just Crash?
The simple answer is that the stock market just crashed because of uncertainty regarding the coronavirus. And investors hate uncertainty.
We don’t yet know how bad things will get. How many people will get infected? How long will businesses remain closed? Will this trigger a recession and if so, for how long?
Because we do not have answers to these questions, the stock market has been extremely volatile. It seems like every day there is a four-digit swing in either direction.
As a result, the stock market just gave back all the gains it earned since the summer of 2017. Could it go even lower? Absolutely. We just do not know yet.
Should You Be Investing at All?
Given that we do not know what is going to happen in the stock market in the short term, should you be investing at all? That depends.
For starters, at Investment U we generally recommend not investing any money you will need within the next three years.
Because there is so much stock market risk, there is always a chance of losing a lot of your money in the short term. As many investors have found out this week.
It’s essential that you have savings put aside in an emergency fund. The broader economy is very likely to enter a recession due to the coronavirus.
Ideally, you will have three to six months’ worth of income put aside in case there are events like a job loss or a medical emergency. Don’t invest that money.
If you have money for emergencies and money you don’t need for the next three years, this is good, investable money.
Now the question becomes, given the stock market crash, what should you be investing in?
Some Timeless Investing Principles
When thinking about investing in any stock market environment, there are some timeless investing principles you should be taking into account.
- Keep Your Portfolio Diversified – Keeping too much money in any one investment is always a bad idea. Make sure you spread your money around a variety of different stocks. This protects you from losing too much money in any one investment. While some stocks will inevitably go down, others will likely increase.
- Pay Attention to Asset Allocation – Just as you want to make sure your stock portfolio is diversified, you don’t want all of your money in stocks either. This is especially true for older and more risk-averse investors. Consider stocks but also corporate bonds, government bonds, commodities like gold and silver, and potentially even real estate.
- Don’t Time the Markets – Market timing is impossible. Nobody can do it. Not even Warren Buffett. And he doesn’t have to. Because he’s in it for the long haul. We do not know whether the stock market has hit bottom during this stock market crash. If you’re nervous that it will continue to decline for the time being, then it’s okay to sit mostly out on the sidelines or invest just a little money. Even if you lose some, though, in the long term, the market will come back and come back roaring. It always does.
- Look at the Underlying Company Fundamentals – In the short term, some companies may see stock price increases due to the coronavirus crisis. For example, many gold stocks were up significantly yesterday such as Gold Fields Limited (NYSE: GFI), up 26%, and Yamana Gold (NYSE: AUY), up 9%. In the long run, companies with strong business models and great underlying fundamentals will be the best survivors and thrive. Think strong revenues, earnings, assets and cash flows.
By keeping these timeless investing principles in mind during this stock market crash, you are bound to do well in the long term. These principles have gotten investors through every previous crisis: The Great Depression, the 1987 crash, the dot-com bust, 9/11 and the Great Recession. And they’ll continue to work into the future.
So What Should You Buy During the Stock Market Crash?
Deciding what to buy in a stock market crash environment isn’t always easy. But if you stick with the timeless principles above, some investments will start to make a lot of sense.
To start, look for industries that are going to remain essential during and after the crisis. There are some things people simply cannot live without.
People still need food. They still need household products like toilet paper. They need soap and household cleaners (and a lot of them).
Where will people be buying these items? The same places they always have in recent years. Big-box stores. Like Target. And Walmart.
And let’s not forget Amazon (Nasdaq: AMZN), as more people than ever will be turning to deliveries rather than buying such items at a store.
We’re still going to need essential technology. Especially for remote work. So companies like Microsoft (Nasdaq: MSFT) with its Teams collaboration software could be a strong player, as could its competitor Slack (NYSE: WORK).
Other office collaboration tools like Zoom also have the potential to do very well in this environment. Zoom is a video conferencing tool that allows you to meet with your co-workers from the comfort of your own homes via video conferencing.
People will still need entertainment. They won’t be going out for it though. So think of entertainment companies you can use from home: Netflix (Nasdaq: NFLX) and Spotify (NYSE: SPOT) could be great examples here.
Also, look for safe havens. Gold is a great example. You can invest in gold stocks or you can invest in gold directly, but either way, it can be a great hedge against short-term losses in the stock market.
Final Thoughts on What to Buy When the Stock Market Crashes
It’s hard to buy stocks when the stock market crashes due to investor psychology. When everyone else is panicking, we want to panic too. We want to protect ourselves and our loved ones.
This is why emotion so often leads to the wrong investment decisions. And why you should disregard your emotions when deciding what to buy.
Look at the big picture. Play the long game. Keep company fundamentals in mind. Diversify your portfolio and maintain an asset allocation strategy that makes sense for you, your age and your risk tolerance.
You’re going to be just fine.
If you would like more detailed information on what to buy when the stock market crashes, be sure to sign up for our daily e-letter in the subscription box below. Investment U’s top experts like Alexander Green and Marc Lichtenfeld can help guide you and your money through these turbulent times.
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.