How to make money when the stock market crashes

Interest rate hikes cause stress, but a financial advisor has tips for anyone looking to take advantage of the stock market during a meltdown.

Until 2022, the Reserve Bank of Australia (RBA) has started raising interest rates and as a result the stock market has been battered, wiping out the value of the US stock market alone by more than $3 trillion ($A4.3 trillion). ).

But where do the markets go from here? And will the stock market bounce back?

What is driving this downturn?

The biggest impact on the headwind global stock markets today are the interest rates. But rising interest rates are simply a response to the current economic conditions, especially high inflation worldwide, the real underlying problem.

The economy of this gets pretty complicated pretty quickly, but the short version is that high inflation is bad and central banks like the RBA want and need to get this under control. The only real tool central banks have at their disposal to achieve this is interest rates. So they raise interest rates, and the economy generally suffers.

When interest rates are higher, people generally spend less. This means less profit for companies and this in turn reduces the performance of their stocks. At the same time, most companies have some debt to fund their operations – so higher interest rates mean they have to spend more on interest costs, which further negatively affects their profitability.

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Market trends

In the course of 2022 we will have the Australian stock market has fallen by a dazzling 16.6 percent. That said, the Australian market has held up better than its global competitors, with the US S&P 500 falling 23.39 percent and the tech-heavy US Nasdaq index falling 31.8 percent for the year so far – both are now officially considered to be in a bear market after losing more than 20 percent.

We know that bear markets happen, with nine official bear markets since 1980. But we also know that markets generally enter their strongest growth periods after periods of decline.

For example, in the bull market that followed the two most recent bear markets in 2008 and 2020, we saw two massive periods of strong growth.

After the global financial crisis of 2008, we saw an 11-year bear run in which the value of the stock market increased by 342 percent. And after the Covid market collapse in 2020, we saw a 126 percent increase in markets in less than a year.

If you had been sitting on the sidelines during these periods, you would have seriously missed the boat.

Making smarter money choices in current market conditions?

It sounds like a lot of doom and gloom, but for savvy investors in the right position, now is the time to take advantage of the current conditions to make a profit. Setbacks make millionaires, and while we don’t have a crystal ball, we know that markets always recover from a downturn to a stronger position than they entered – it’s only a matter of time.

Timing the market is pointless

In periods such as we are experiencing now, I always get a lot of questions from investors about whether and how they should change their investment strategy to take full advantage of the current market conditions.

Our inner investor goes into overdrive and we get caught up in thinking about everything money we’re going to make – the psychology of a downturn is hard to escape. But history has taught us that choosing the perfect time to invest is nearly impossible, and the trickier you try as an investor, the greater your chances of losing.

Even the professional investors can’t time the market well and consistently, with statistics showing that they wrong more than 94 percent of the time† In my opinion, trying to do this yourself is a pointless endeavor that will probably end up costing yourself a lot of money (and causing a lot of stress in the process).

Smart investing in a declining market

While it’s nearly impossible to time the market, there are three key things you can do to make smarter investment choices as the markets go through periods of turbulence.

The first thing to do is choose solid investments, and only invest in good, strong companies that are well positioned to get through the other side of this turbulent period.

The second is being smart about your investment planning. You should choose investments that fit into your broader money plan, not just investments that are good in absolute terms. You want a good plan in your to invest that you can track regardless of short-term market conditions.

And the third is to make sure you are never forced to sell investments at the wrong time. You only lose on an investment when you sell it, so if you are never forced to sell at a time that doesn’t make sense, you can hold onto your good investments until they give you good results.

If you do these three things right, you will be well positioned to weather these market conditions and be stronger on the other side.

the cover

No one can predict the future of the stock market, but there are a few things we can be sure of. The stock market will remain volatile and there will be ups and downs. We also know that good companies will continue to do good business and economies will grow.

This creates an opportunity for savvy investors with a solid approach to take advantage of this uncertainty and come out better on the other side.

Ben Nash is a financial expert commentator, podcaster, financial advisor and founder of Pivot Wealth www.pivotwealth.com.auand author of the Amazon Best Selling Book “Get Unstuck: Your Guide to Creating a Life Not Bounded by Money.” www.getunstuckbook.com.au

Ben has just launched a series of free online money education events to help you get on the first financial foot. You can view all details here and reserve your place

Disclaimer: The information in this article is of a general nature and does not take into account your personal goals, financial situation or needs. Therefore, you should consider whether the information is appropriate for your circumstances before acting on it, and seek professional advice from a financial professional if necessary.

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