The stock market has been struggling in the second half of 2022. This market crash has some investors (and would-be investors) concerned about how to move forward with their plans.
So, how do you make the most of a market crash? Let’s take a look at how you can benefit during times when the stock market is struggling.
3 Tips for Investing During a Stock Market Crash
A stock market pullback is a good time to put more money into the market. It seems counter-intuitive, but the reality is that you have opportunities. When the market is down, stocks are on sale. Here are some tips to help you stay on track during a market crash.
1. Don’t make decisions while panicked
The first key is to avoid making decisions based on fear. While you can’t eliminate all emotion from your financial choices, you can rein in your fear. Don’t panic and sell. Remember: you haven’t lost money until you lock in those losses by selling.
You might decide to sell some of your assets during a market downturn, but it’s important to make that decision based on fundamentals and sound reasoning, not out of panic.
2. Stick with dollar cost averaging
One of the best strategies for many investors is to use dollar cost averaging. With this approach, you put the same amount of money into your investments each month. Usually, you make it automatic so that you don’t have to think about moving your money around.
When you continue dollar cost averaging during a market crash, you put in the same amount of money but buy more shares. You don’t have to change a thing, but you get more investments. When the stock market begins to recover, you have more shares. As a result, you’ll see bigger gains over time.
3. Look for bargains
For those interested in individual stocks, a market crash can be a good time to look for bargains. You can get new assets cheaply, whether it’s crypto winter or a stock market pullback.
Carefully consider whether the prices are low enough to make it worth getting into something new. Also, consider where the asset fits into your portfolio strategy. You shouldn’t buy something just to buy it.
One way to evaluate stocks during a downturn is to use a tool like Stocks for the Week. With the help of this tool, you could potentially find undervalued stocks on sale during a market crash.
What About Selling During a Market Crash?
Sometimes, selling can be an advantage during a market crash. Even though you might lock in losses, sometimes those losses can be to your advantage.
Tax loss harvesting
Through tax loss harvesting, you can use investment losses to your advantage. When you sell at a loss, you can get a tax benefit. There are two ways to benefit from selling at a loss using tax loss harvesting:
- Offset gains: If you had investment gains earlier in the year, you might have to pay capital gains tax. However, if you have losses, they can offset those gains, reducing your tax bill.
- Reduce your income: After you offset your gains, you can reduce your taxable income if there are still losses. It’s possible to reduce your income by up to $3,000 in investment losses. And, if there’s still money left over, you can carry it forward to another year.
You need to be careful with tax loss harvesting, however. If you buy the same thing back within 30 days, it’s a wash sale, and the IRS won’t allow you to harvest those losses on your tax return.
Use the proceeds to buy something cheap
You can also use the proceeds from the loss to buy something cheap. Now you have cash. If you were hoping to try a different asset, you can experiment with the proceeds from your loss. You can harvest your losses and buy other assets cheaply if you don’t fall afoul of the wash sale rule.
This can be a good way to rebalance your portfolio without worrying about paying capital gains taxes.
No matter how you move forward, though, it’s vital that you are thoughtful in your approach. You don’t want to end up in a worse situation. Make sure to consider your long-term investing and financial goals before you change your portfolio during a market crash.
Bottom Line
A stock market crash can feel scary, especially if you often look at your portfolio balance too often. In many cases, your best move during a market crash is to stay the course and stick to your plan. Eventually, the stock market will likely recover, and you’ll be better off staying in the market than panicking and taking your money out.