Dow Jones lost 512.76 points (-4.31%)
S&P500 lost 60.27 points (-4.78%)
Nasdaq lost 136.68 points (-5.08%)
TSX lost 435.90 points (-3.40%)
This is the perfect example of a “flash crash”; a stock market crash of 3, 4 even 5% in a single day. This was almost the norm back in 2008 when volatility was at its peak. Since then, we haven’t seen this happening too often. With all the Government debt problems around the world, chances are we are going to see a few more flash crashes.
So what you should do during a stock market flash crash?
#1 Cancel your stop loss orders
Stop loss orders are very useful if you don’t have time to follow the market on a daily basis and you want to avoid bad news related to one of your stocks that could affect its value in a short period of time (as was the case with RIM and YLO not so long ago). However, when the market plunges that fast, all your stocks will drown in the same rotten pool of bad stocks. So regardless if one company could be affected or not by the economic news; it will drop during a flash crash. The problem is that you could end-up selling a few stocks for nothing because you have stop loss orders that are too close to the stock price. The Stock market has a frustrating habit of rising not so long ago after a flash crash. Therefore, you will probably end-up selling your stock at a low price for a poor reason and buying it back at a higher price a few days later. This doesn’t sound like a great investing strategy!
#2 Ask questions; then shoot
Don’t try to play the cowboy here. If you sell your stock in panic mode, all you do is contribute to the mass effect and lose money at the same time. This won’t be of any use for both your own portfolio yield or the stock market in general!
You should do some research; try to understand what are the causes of the flash crash. I’ll bet 99% of the time, the cause is related to fear. Then you need to assess this fear and see how it could directly affect your dividend holdings. If you have stocks that are directly impacted and you can determine that the news announced was really something that was not factored into the price, you may want to sell.
#3 Cost Average!
By doing systematic investments or injecting timely liquidity in the stock market after a flash crash, you can certainly improve your overall yield. I’ve already mentioned that it is hard to time the market, but if you have some cash lying around and have some stocks on your radar, you can shoot faster than a sharpshooter and pick up great stocks at low prices. It’s like going to Walmart on Black Friday!
#4 Aim for Dividend Stocks
There is nothing better than a market crash to buy solid dividend stocks! Why? Because you have the opportunity to buy a solid company with a low dividend payout ratio but, because it is affected by the mass panic, it will pay a high dividend yield! People will still drink Coke (KO) during the recession and you now have an opportunity to buy it at almost a 3% dividend yield! Considering the company is doubling its dividend every 6-7 years, you will end-up with a 6-7% dividend stock within the next 10 years! This is a great opportunity! All you do is to aim for solid companies with key dividend ratios.
You can learn more about dividend investing by downloading my FREE Dividend Investing eBook!