The stock market crash came suddenly, triggered by a virus. The corona crisis sent the global stock exchanges down in March 2020 and caused one of the biggest financial crises of all. Find out here how you as an investor should position yourself, what you should basically do in the event of a stock market crash and how you can arm yourself for the next stock market crisis.
CORONA VIRUS PUTS INVESTORS IN SHOCK
The stock exchanges have been doing surprisingly well for years. There were always short setbacks, but these were soon followed by new highs. There would have been enough reasons for a stock market crash: the slowing economy in Europe, the trade dispute between the USA and China, possible US tariffs on EU imports, Brexit, etc.
However, it was not economic problems or a real estate bubble that ultimately caused one of the greatest stock market crises of all; it was a virus that put investors into shock and sent indices, stocks and commodities downhill. Within a few weeks between mid-February and mid-March, important country indices such as the German DAX or the US Dow Jones lost a third of their value. The very broad MSCI World Index, which is important for many investors, also slipped by almost 30 percent at times. (Also Read: How to get NFT for free. Instructions for creating and selling tokens)
This post explains how you as an investor react to a stock market crash like this and how you should best behave now in the Corona crisis. We’ll tell you why an investment can make sense in a stock market crisis and what advantages long-term investors such as ETF savers can have from a setback on the stock market.
BEFORE, DURING AND AFTER A STOCK MARKET CRASH
The corona crisis left major skid marks in the portfolios of most investors, and the sudden crash hit both professional and private investors freezing. Such a crash was almost unthinkable just a few days earlier.
In contrast to the financial crisis and the subsequent euro crisis a few years ago, this time there were no signs of an impending stock market crash. Hardly any stockbroker could have foreseen in advance how the pandemic triggered by this new type of coronavirus and the subsequent economic consequences for companies around the world would spread fear and horror among investors.
Presumably only investors got away with it relatively lightly who had prepared their securities accounts in advance against such a sudden setback on the stock market. For example, those who had hedged the securities in their portfolio with stop loss orders or trailing stops could keep the loss within limits.
CORONA CURRENTLY – THIS IS HOW INVESTORS SHOULD BEHAVE IN THE CORONA CRISIS
The coronavirus caused the fastest stock market crash ever , according to an analysis by Bank of America . Within a few days, the corona crisis brought investors price drops in indices, individual stocks and commodities, which were significantly worse than those of the 1973 oil crisis, the crash caused by the bursting of the dot-com bubble in 2000 and 2001 and the financial crisis in 2008 and 2009 There has never been a similar scenario in the past. Accordingly, no serious expert can predict exactly when this stock market crash will finally be over and when the DAX, Dow Jones & Co. prices will return to their pre-crisis levels.
THE CORONA CRASH AS AN OPPORTUNITY FOR INVESTORS
First of all, it can be said that it is generally a good idea to invest your money in the stock market – especially in times of record-low interest rates. For example, anyone who invested their money in a DAX ETF in the ten years before the Corona crisis was able to increase their capital by more than 120 percent: between 2010 and 2019, 100,000 euros became more than 220,000 euros.
Furthermore, it is good if investors do not buy their stocks at a high. A crisis can therefore offer an opportunity – especially with a long-term investment strategy. Those who do not buy at the peak of the market, but significantly below, increase their chances of return. At the same time, the risk for investors of remaining in the red for a long time is reduced.
IN TIMES OF CRISIS, CAUTION REMAINS THE TOP PRIORITY
So there are many arguments in favour of entering the market in times of crisis and at rock-bottom prices. But you should always do this with caution, you shouldn’t put everything on one card . In the current crisis, this means that you should watch the developments of the coronavirus in Germany and around the world. Find out regularly about coronavirus news and whether the individual countries can contain the corona pandemic with their measures. Take a critical look at the markets and initially enter carefully with small amounts – this applies in every phase of weakness on the stock exchange, but especially now in the current Corona crisis.
GET INTO INDIVIDUAL STOCKS NOW? ONLY FOR PROFESSIONALS
During an ongoing bear market, we advise less experienced stockbrokers not to invest money in individual stocks. “Old hands”, on the other hand, are usually able to assess the opportunities and risks relatively well during a stock market crash – presumably also during this corona crash.
For those who are familiar with the market and deal intensively with the selection of stocks, the current situation can be a starting signal to enter the market. The corona crisis offers long-term investors in particular the opportunity to enter substantial companies at particularly favourable prices. In the midst of a stock market crisis, however, investors should pay special attention to quality stocks , including SAP, Microsoft, Amazon and Apple.
THIS IS HOW INVESTORS PROTECT THEMSELVES FROM A STOCK MARKET CRASH
Investors who want to be successful on the stock market for many years have to observe various rules. For example, you should put your finances on a stable footing and diversify your securities broadly, i.e. invest in different industries, assets, topics, countries and companies.
SET STOP LOSS AND LIMIT LOSSES
Stop loss orders are a very simple way to limit losses. Investors inform their broker of a price level below the current price. If this price level is reached, the broker automatically triggers a sell order.
The main advantage of stop loss orders: Investors limit their losses automatically and without constantly monitoring the prices. If you lose 10 percent of your stake, you need a profit of 11.1 percent to get back to the starting level. On the other hand, if you lose 50 percent, you need 100 percent profit later.
TRAILING STOPS PROTECT PROFITS DYNAMICALLY
Trailing stop loss orders supplement a simple stop loss with an adjustment mechanism. The stop threshold is “pulled behind” rising prices.
This means the following: If the share rises to 110 euros, the stop level also automatically rises to 100 euros. If the price reaches 120 euros, the level is increased accordingly to 110 euros, etc. (Check: Goldman Sachs: What Hedge Fund Investment Managers Really Think About Bitcoin)
PUT OPTIONS – INSURANCE WITH AND WITHOUT “DEDUCTIBLE”
Investors can use put options to hedge their portfolio against price losses caused by a stock market crash. In practice, most private investors will not fall back on options contracts on the Eurex futures exchange, but on warrants. Many banks issue warrants as bearer bonds and replicate the structure of an option.
The basic principle of a put option is very simple. The options relate to a specific underlying, for example the DAX. Each option has an exercise price. The holder has the right to sell the underlying asset at this price.
Here is a case study based on a DAX level at 12,300 points: If the exercise price of a put warrant is 12,300 points, the holder of the option can, in simplified terms, sell the DAX for 12,300 points. This right increases in value the further the DAX falls below this mark.
WHAT DOES PORTFOLIO INSURANCE WITH PUT OPTIONS COST?
However, the costs of this insurance are not entirely insignificant. Anyone who chooses full hedging for all courses below with an index level of 12,300 points pays around 820 euros for the necessary put warrants. This corresponds to an insurance premium of around 6.7 percent. (Also Read: How to get NFT for free. Instructions for creating and selling tokens)
Gold is considered the currency in crisis par excellence. Is that why the coveted precious metal is also suitable as insurance against a stock market crash? The answer is: only limited.
Gold will retain its value even when everything else is worthless. However, this does not mean that a (generally temporary) crash on the stock markets is necessarily offset by a sufficiently large position in the gold market. Gold is an insurance against inflation and crises, but does not always guarantee a certain deposit value.
Nevertheless: In the opinion of most asset managers, nothing speaks against a share of 5 to 15 percent in the portfolio. Opportunity costs in the form of a secure interest rate on government bonds do not currently exist anyway. Anyone who physically buys gold can keep it at home, in a locker or in a security store. Securities related to gold are cheaper.
BITCOIN CANNOT BE THE NEW GOLD JUST YET
Some see the new gold in the crypto currency Bitcoin. It is possible that the coin faces a great future. It is also conceivable, however, that it will lose importance (and value) again. Bitcoin has too little history to be the new gold. The digital currency is therefore not suitable for hedging a portfolio against a stock market crash.