The stock market can sometimes be unpredictable and volatile, and no investor is immune to its fluctuations. However, contrary to popular belief, market crashes are not always bad news for investors. During a stock market crash, there are several opportunities for smart investors to buy stocks at bargain prices and create long-term wealth.
In this comprehensive guide, we’ll explore different strategies on which stocks to buy in a time of stock market crash and how to build a profitable portfolio in uncertain market conditions.
Understand the Market Environment
Before jumping into any investment decisions, it is imperative to understand the current market environment. The stock market is known for its cycles of peaks and troughs, and it is crucial to recognize the different stages of the market trends.
The market typically operates in three stages: bull market, bear market, and market correction. A bull market is characterized by a period of continuous growth where the stock prices rise. On the other hand, a bear market is the phase where the prices drop by 20% or more. Lastly, a market correction is a period of declining prices in the stock market, typically less than 20%.
Identifying the current market trend can help you make better investment decisions. During a bear market, for instance, investors should stay focused on long-term goals, letting go of short-term gains. In contrast, during a bull market, it is important to take profits and rebalance the portfolio for better risk management.
Invest in Defensive Stocks
Defensive stocks are typically stocks of companies that provide essential products and services, regardless of the market conditions. These companies may include utilities, healthcare, consumer goods, and food and beverage companies.
During a stock market crash, defensive stocks act as a safe haven for investors as they are less prone to market volatility. Such stocks may not rise significantly in a strong market, but they help even out irregular fluctuations during a downturn. Defensive stocks are typically viewed as a long-term hold, and investors may have to monitor them less frequently.
Consider the Dividend-Paying Stocks
Dividend-paying stocks are an excellent choice to invest during a stock market crash. Dividend stocks are typically shares of companies that pay dividends or profits to the shareholders. These types of stocks may offer steady income and provide some stability during challenging market conditions.
Dividend stocks are generally great investments for long-term objectives as they provide consistent returns. Furthermore, acquiring dividend stocks at a lower price during the market crash would result in higher yields when the market recovers.
Continue Investing in Tech Industry
Technology companies had performed exceptionally well even in the face of a pandemic in 2020. The technology sector – with companies dealing with Zoom, Amazon, Microsoft, and others – was an essential tool for many businesses during the pandemic. With people staying and working from home, the need for technology and digital services increased significantly.
As such, continuing to invest in tech stocks during a stock market crash could be attractive as the demand for technology grows. However, investors should invest selectively on tech stocks that have a better chance of survival and thrive in a challenging market.
Invest in Stable Blue-Chip Stocks
Blue-chip stocks are popular among investors because of their stable track record for a long time. Blue-chip companies are typically well-established market leaders with a proven track record of a strong balance sheet, solid fundamentals, and reliable dividend payments.
Such companies include Apple, Walmart, Coca-Cola, and Johnson & Johnson, among others. During a stock market crash, these companies’ stocks may suffer the short-term dip, but they are more likely to recover due to their strong financial position.
Diversification is an essential principle of investing that can help reduce risks during volatile market conditions. Diversifying a portfolio with several types of stocks, including stocks of small-cap, mid-cap, and large-cap can help reduce volatility and spread risks. Additionally, diversifying across sectors and industries can help reduce the potential impact of a downturn of a particular sector.
Investing in the stock market during a time of market crash can be challenging, but it can also present opportunities for investors to buy quality stocks at a discounted price. By understanding the market environment, investing in defensive stocks, dividend-paying stocks, tech industry, blue-chip stocks, and diversifying the portfolio, investors can make better investment decisions and build long-term wealth.