Stock market crash: Stock market down – how should you react?

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In recent months, prices on the world’s major stock exchanges have plummeted. This has led to great uncertainty among numerous investors. They do not know how to behave properly now.

In the following article, we will therefore show you which strategy will help you to survive the turbulent stock market phase. Falling prices offer great opportunities if you act correctly.

The most important information in 30 seconds

• major indices worldwide have recorded price losses of more than 20%
• such stock market phases, also called bear markets, are quite normal
• as an investor you should stay calm and see an opportunity in the stock market crash
• in the long term, share prices will rise, so that you can achieve high returns with the right diversification and the purchase of good company stocks
• if the geopolitical situation eases again, a recovery and thus a next bull market is likely.

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We are currently in a bear market

On the stock market, a fundamental distinction is made between bull and bear markets.

• A bull market can be defined as a period of stock trading in which prices rise almost exclusively over a longer period of time. Minor setbacks are normal and are offset by higher highs. There is great euphoria in this market phase and no one expects bad price developments.
• The opposite of a bull market is the bear market, in which we currently find ourselves. If prices on the stock markets fall by 20% or more, experts speak of a bear market. Two consecutive months of price losses also characterize such a phase.

Looking at the Swiss Market Index (SMI), it is clear that it is trading around 25% below its peak. At the beginning of 2022, the index reached almost 13,000 points. By contrast, at the beginning of October 2022, it is struggling to reach the 10,000 point mark. The other major stock market indices, which include, for example, the S&P 500, the DAX and the Dow Jones, are also experiencing similarly high price losses.

Many investors are looking for the reasons behind the developments of recent months. They are also wondering how long prices will continue to fall. There are many reasons for the bear market. The following aspects lead to the falling prices on the stock markets:

• the start of the Russian war of aggression
• the uncertainty associated with the war (the stock market does not like uncertainty)
• a global increase in inflation
• monetary policy measures of central banks (rising key interest rates)
• after a bull market that lasted more than 10 years, a bear market is not unusual and healthy

Ultimately, a combination of the aforementioned reasons is favoring the current stock market situation. In addition, there is a great deal of uncertainty and fear among investors. These tend to sell shares in a bear market. This often results in a situation on the markets where every investor sells in panic and prices fall significantly over weeks and months.

However, as an investor, you should consider the following two aspects and keep them in mind:

1. Bear markets are a great opportunity because you can buy stocks cheaper
2. Every bear market is followed by a bull market

A look at the past shows you why you should act wisely and keep a cool head right now. Then you will emerge as a winner from the bear market.

A look at the past illustrates the opportunities of the current crisis

If you look at the last decades, you will see that there have been bear markets time and again.

• The bursting of the real estate bubble in 2008 can be counted among the best-known bear markets in history. The bear market lasted from June 2007 to March 2009, and 7 quarters passed before the bull market started again.
• Another bear market hit the stock markets in August 2000. The dotcom bubble burst and the world was in a bear market (= bear market) until March 2003.

In an article, the Handelszeitung has listed the bear markets chronologically since 1928. This overview makes it clear to you that bear markets do occur from time to time and that they are not unusual. Bear markets have historically lasted an average of about 9 quarters. So staying power pays off when investing in the stock market.

Keep in mind that no one can predict exactly when bull and bear markets will start. As a rule, this can only be recognized and analyzed in retrospect. So always prepare for different market phases.

The development of the stock markets points in a clear direction in the long term

Various companies have analyzed the price developments on the stock markets over the past years and decades. As part of this research, they have determined that you, as an investor, would have achieved a positive return on your investment in the SMI in 40 out of 53 years since 1969. The overall performance of the SMI is therefore clearly pointing upwards, despite intermittent price corrections in the context of bear markets.

For example, if you had invested regularly in the SMI from 1977 to 2021, you would enjoy an average annual return of 9.96% today. Other indices, such as the Dow Jones and the DAX, have also achieved a similar performance.

From the data, analysis and graphs, it can be deduced that stocks rise in the long run and thus provide higher returns compared to other investments (for example, gold, real estate and bonds). So far, the stock markets have always recovered sooner or later after a slump. Go for long-term investments.

Real estate markets, on the other hand, have sometimes gone sideways for years or decades. The same development can be observed with gold and other precious metals. With an investment in stocks, however, you have always been right, at least historically.

The reason for this is that economies around the world are increasing their productivity and aiming for a higher gross domestic product. Innovations and increasing globalization are also price drivers. This is not the case with commodities or other forms of investment, which is why you would sometimes have achieved little or no return with gold, for example, over decades.

How should you act as an investor?

The past is no guarantee of how prices will develop in the future. Nevertheless, a trend and a strategy for action can be derived from it. In the current uncertain stock market times, this in turn helps you to make the right decisions. As an investor, you proceed as follows, knowing that bear markets occur from time to time and that they are normal:

1. Remain calm and keep your long-term goal in mind.

Among other things, this means that you continue to invest regularly and do not allow yourself to be unsettled by negative reports on the stock market. You simply sit out the bear market patiently, follow your private financial planning.

2. Review your portfolio regularly, but do not fall into actionism.

Many investors tend to impulse sell because they are scared. This leads to lower returns and even losses in the long run. Stay calm and buy undervalued stocks. After all, the crash is where the money is made. You buy the stocks cheap from the investors who are scared and profit during the next bull market.

Most investors make the mistake of selling in a bear market and then missing the start of a bull market. This should not happen to you. Psychologically, however, it is hard to watch prices fall for months or even years and still continue to invest.

Psychology plays a role in stock market investing that should not be underestimated. If you are mentally strong enough and act anti-cyclically, it will pay off for you.

3. Stay invested so that you do not miss the upswing

Especially the particularly good and stable stocks recover quickly after the bear market. Therefore, be sure to hold on to these stocks. No one knows when the bull market will start and you definitely don’t want to miss it.

4. Keep a cash reserve to make new investments after the bottom is formed

We recommend that you invest regularly. This way, you will definitely not miss the bottom. If the market runs sideways for a very long time and the mood among market participants is exclusively negative, this often indicates a broad bottom. In this case, you should have cash reserves to reinvest. In addition, it is important that you never rely on the money invested in the stock market and have enough cash reserves to easily survive bear markets and the interim losses.

Also, take advantage of allowances and retirement planning tools, read more in these articles:

• Switzerland’s 3-pillar principle
• Vested benefits principle
• Vested benefits account

Price declines always offer great opportunities

Most people don’t like bear markets because prices plummet and they have book losses in their portfolio. However, bad times on the stock market offer enormous opportunities. If you analyze the market carefully and buy stable company stocks, you will achieve above-average returns in the long term.

In particular, the insurance, tourism and consumer goods sectors have a stable business model and recover quickly after crises. It should be noted that you should diversify your portfolio as broadly as possible. For newcomers, an ETF is also more suitable. New investors can use the MSCI World, for example.

It is also advisable to invest in large companies that have suffered particularly heavy price losses. Take advantage of the crisis and diversify your portfolio. This also means that you invest globally. So, for example, buy company stocks from Switzerland, but also from America, the euro zone or Asia.

When will the stock markets recover?

Basically, no one knows when the markets will rise again. However, past experience shows that indices are very sensitive to decisions made by central banks and governments. The current global economic crisis will probably be over when inflation falls and stabilizes at a moderate level.

The Russia-Ukraine conflict also has a major impact on prices. If it becomes apparent that the war will end, this could lead to an upswing on the stock market. Ultimately, falling key interest rates and a loosened monetary policy on the part of central banks, as past experience has shown, lead to a rally on the markets.

One possible development in the coming months could be that the central banks raise key interest rates even further. This is largely priced into the markets, but an unexpectedly high increase could lead to another small stock market crash. However, the even higher interest rates should bring inflation down in the medium term.

With the end of the war between Russia and Ukraine, the pressure on the commodity and energy markets will also ease. The central banks will then lower interest rates again to help the economies out of recession. All these factors could trigger a next bull market.

However, this is only a possible scenario. The market is ultimately dependent on many economic and political variables and factors and is currently very volatile.