Investors fear nothing more than a stock market crash. Fear of loss, when share prices fall, they usually make wrong decisions and lose so much money. But how can an investment portfolio be confidently maneuvered through crises? The most important questions and answers. When stock prices slide, journalists reflexively call professional asset managers. They ask how they “react” in view of the desolate situation – and what the professional investors would now advise private investors. A day later, stories appear with often questionable tips on how investors can protect themselves from a stock market crash. In fact, some of this advice is harmful. Because the topic comes at the wrong time. The market penalizes investors who only worry about a price plunge after it has already started. The likelihood that they will make half-baked investment decisions that will cost a lot of returns is high.
There aren’t many investment strategies that work in a stock market crash and are also promising in good times. Strategies that dampen share price losses usually deliver lower returns in the long term than a so-called buy-and-hold strategy, in which an investor always stays in the market and simply sits out crises. But the latter is much more risky. Every investor has to find out for himself what the right balance between return and risk is -there is no silver bullet. The key is to define the strategy before investing and to stick to it consistently- in good times and bad. The only way to achieve the desired investment success.
Can a stock market crash be reliably predicted?
No. The development of share prices cannot generally be predicted with certainty. If so, the stock exchanges would be a safe place for investors to invest without risk. However, the returns would then no longer be higher than the interest on a savings account. Smart investors ignore forecasts of price developments and possible stock market crashes. Because such predictions are nothing more than expressions of opinion by people who, like all other investors, know just where the stock markets will be in the future. Stock market forecasts are marketing. Those who shout out their image of the future are ultimately only concerned with selling their products. Investors who put their portfolios together on the basis of forecasts usually generate below-average returns. Actually, that’s a simply due to the fact that stock market predictions are usually wrong. If the expected actually happens, it is a coincidence. But solid returns cannot be achieved in the long term based on coincidences. Since it looks not possible to reliably predict how the various asset classes, country stock exchanges, industries or stocks of individual companies will develop, successful investors spread their assets over a large number of investments.
Should investors sell their shares in a stock market crash or at least reduce their share of shares?
Investors who think about selling on the gut as soon as prices start to fall have a hard-to-solve timing problem. Nobody knows how far the prices will plummet or whether the losses will escalate into a stock market crash. A crash can always only be diagnosed afterwards. Anyone who lets himself be guided by his emotions and sells shortly before the market turns up again, and later re-enters at higher prices, reduces his return considerably. Assuming the prices actually fall quite a bit further after a sale, then the question arises when the right time is to re-enter. Most investors will wait too long and end up winning little. Instead, they racked their brains for weeks or months in search of a clear indication of a stable market recovery.
What does good diversification bring in a stock market crash?
For private investors, sophisticated diversification is the foundation of a successful investment. But the distribution of risk across global equity markets has its limits. Because in a stock market crash, share prices usually fall worldwide. However, investors can diversify the risky part of their portfolio with additional asset classes . For example with emerging market bonds, high-yield bonds, gold, commodities and exchange-traded index funds (ETF), which map particularly stable industries
Is it beneficial to hedge the equity portfolio in the event of a stock market crash?
Usually this is not the case. The timing problem is the same as described above. In addition, dealing with securities, with which investors can bet on falling prices, requires in-depth knowledge and experience. This applies to put warrants, for example . They are a kind of insurance against falling prices for which the buyer has to pay a premium. The greater the volatility on the stock markets, the higher this premium is. In other words: when investors need insurance most in a stock market crash, it is most expensive. If the market does not continue to fall as expected and turns up again, the puts expire worthless when they mature. The premium paid, however, reduces the return on the portfolio. To solve the timing problem, investors could of course hedge their shares permanently with puts. The gains from these positions during stock market crashes largely offset the losses in the stocks. However, in normal trading hours, when prices tend to rise or move sideways, the puts make losses.