The memory of past stock market crashes is still fresh in the minds of many investors, especially older ones. They still remember all the savings wiped out by these violent stock market movements that devalued all international equity markets. To such an extent that several financial market gurus have already predicted a similar event in the coming months, or perhaps even years.
Should an event of this magnitude unfold, be prepared immediately, as it will be the worst-case scenario. You could lose far more money than you initially imagine . However, it could also generate business opportunities due to the wide range of financial assets in which you can invest your money right now, through new financial products designed to cover all possible scenarios.
A stock market crash is a very serious matter that you can't take lightly, much less with spontaneous actions that lead nowhere. You'll need to have a plan of action in place should this movement unfold in the coming months. This is especially important to protect your investments through more decisive and rapid actions. The only way to do this is to implement an exceptional investment strategy.
Historical background of the stock market crash
If there has ever been a stock market crash par excellence, it was undoubtedly the one in 1929. Its consequences are etched in history and economics textbooks, and even depicted in some films that portray this historical event. The 29 crash took place on October 24, 29, and was known as Black Thursday, triggering what would become the Great Depression.
Stock prices plummeted to unprecedented levels. Many investors were completely ruined during those fateful days for the entire world, as speculators sold all the shares in their investment portfolios. Such was the panic in the financial markets that the surge in sales further reduced the value of stocks.
All investors, large and small, began to unload their positions with one very clear objective: to lose as little money as possible. The effects were devastating due to their particular severity. Many savers lost more than 80% of their capital invested in the stock market. And others, even worse, simply went bankrupt. Poverty took hold in a large part of American society, with consequences we all know.
Other cracks through history
This financial collapse has been recorded in many history books. It wasn't the only stock market crash; others followed, although with much less intensity. The 87 crash , popularly known as Black Monday, is particularly noteworthy. It was one of the worst trading sessions in the history of the American stock market, which plummeted by more than 500 points, with its benchmark index depreciating by over 22%. This was unprecedented in the financial markets at the time. It certainly shook the interests of thousands upon thousands of investors. Among its causes were a very high trade deficit, high inflation, the war in the Persian Gulf with its associated oil supply problems, and finally, significant tensions in the housing market.
This perfect storm that developed in the stock market had another aftershock in 2008 , the consequences of which we are now facing. Although we are referring primarily to the global stock market crash of October of this year. With a historic drop in stock prices across virtually all the world's exchanges, practically without exception. The declines were brutal, exceeding 10% in a single trading session or over several sessions.
What could happen now?
So far, this has been a brief overview of these movements over the last hundred years. But what would happen if a crash were to occur right now, or very soon? Well, it would also have devastating effects on investors' interests , including yours. For starters, the plunge in stock prices could exceed 20%. That's a lot of money tied up in your equity positions.
It would affect all stock markets, without exception. This would be exacerbated by the increased globalization of the economy, and by extension, of stock exchanges. There would be no respite , and you would almost certainly lose more than ever before, perhaps even wiping out all your investments. While there are now stronger safeguards, they would be of little use in this scenario, so undesirable to all market participants.
Of all the tools available, there are very few you can use if this violent scenario for company stock prices materializes worldwide. Only with some preventative measures will you be able to mitigate its effects . And the lines of action you should take to protect your life savings are geared towards this goal.
Its main effects on money
If a crash like the previous ones happens, things will go badly for you if you have open positions in equities. You'll lose more than ever before, even risking financial ruin . As a consequence of these abrupt movements, you'll have no choice but to make massive sales in the financial markets. And always at market price, which will be very low, practically free from today's perspective.
They will cause you to lose a large part of your invested capital, with depreciations that can dangerously approach 50% . However, you can reduce this loss if you act diligently when the stock market crash occurs. But the truth is, the self-defense mechanisms you will have at that time are minimal. So many sell orders will be generated in the financial markets that it will be very difficult for them to be executed, much less at the prices you want to finalize the transaction in the equity markets.
If you have not sold in the previous days you will have much more difficulty doing it from these exceptional moments. Not surprisingly, you have to put yourself in the worst case scenario and assume that things are going to go very badly for you on the stock market. Without exclusions because the cracks affect all series of values, indices and sectors of the stock market. You have no escape if one of these situations develops so undesirable for your interests.
What should you do?
At the precise moment in which a crack originates, whatever its nature, the most imperative thing will be to get rid of your open positions as soon as possible, without delay. It will be the only way to save a part of your savings. Given this, you will have no choice but to apply a series of actions that will be necessary in these cases. They are as follows.
- Try by all means that the shock wave does not reach you fully. This means that you will have to cut the falls the first day. And in this way avoid that the cuts focus even more on the next sessions of equities.
- Don't obsess over sell your shares at a price set by you. But on the contrary, you must formalize it under a market price. It is the only possibility for the order to be executed on the sale of the shares.
- Don't try to wait to see how financial markets evolve. It will be a serious mistake that you can regret after a few days due to the low liquidity of the stock markets.
- As a solution to close positions in the financial markets, you can use a little trick if you have a lot of money invested. It is none other than to perform partial sales to save at least part of your invested assets.
- In these special situations, no possible strategy is worth, but you have to have to make very radical decisions and in a short space of time. Not surprisingly, the minutes play against you.
- You can't set goals for yourself either since you are at the expense of the equity markets, and you have little margin to operate in your investments.
- Despite the low prices with which the securities were listed don't try to buy their shares. At least in the short term. With all certainty, you could worsen your situation, reaching levels that are practically unacceptable on your part.
Can you see a crack?
It's very difficult to predict events. Even the top experts haven't managed it. You can only interpret that something serious is happening in the stock market. Therefore, it's not worth holding positions in those stocks. The only clue comes from the evolution of the economy, especially when serious imbalances arise in some of its main indicators or parameters.
A crack is usually preceded by some intensity downward movements. They can warn of what may happen in the coming months, or even weeks.
In any case, during these exceptional movements, stocks and indices can lose half their value, reaching levels unseen in recent years. Ultimately, this is the worst thing that can happen to you in the stock market. You won't have many mechanisms to safeguard your savings, and even then, they will always be limited. Finally, don't forget that you will always be exposed to the financial markets, with little you can do about it.