Stock Market Crashes Can Change Your Life for the Better

11 ways a stock market crash might be just what you need

Stock market crashes can feel like a punch to the gut. One moment, your investments are thriving, and the next, they’re plummeting. When that’s going on, it can be easy to focus on the negatives, but these downturns in the market can have some surprising benefits.

Background: Stock Market Crashes, Defined

A stock market crash is usually defined as a sudden and significant decline in stock prices across a major segment of the market, often characterised by a rapid drop of over 10% in a stock index within a few days.

This decline can be triggered by various factors, including economic crises, catastrophic events, or the bursting of speculative bubbles. During a crash, panic selling typically ensues, as investors rush to sell their stocks out of fear, which exacerbates the decline.

Let’s explore how a stock market crash might be the catalyst for positive change in your life.

1. A Chance to Reflect on Your Financial Goals

When the market takes a dive, it’s a wake-up call.

You might find yourself questioning your investment approach, investment assets, big-picture financial goals, and maybe even your sanity! This is a great opportunity to reassess what you want from your investments. Are you saving for future financial freedom, early retirement, or haven’t you clearly defined the purpose just yet?

A market crash can help clarify your priorities and motivate you to identify more robust financial goals, which can help you develop the action steps needed to reach them.

Set Clear Objectives

Where do you want to be in five years? 10 years? More?

Take some time to sit down and write out where you aim to be, which should include financial and career matters. It isn’t just limited to money though, think broadly: your family, relationships, your health, spirituality, commitment to cause or community, and so on.

Be as specific as possible. Having clear objectives can guide your life choices, which includes your investment and financial decisions. This will help you stay focused, especially during the turbulent times which are inevitable across a lifetime of investing (or a lifetime of anything else, for that matter!).

Short-Term Versus Long-Term Goals

When goal setting, it’s important to differentiate between short-term and long-term goals. Short-term financial goals might include saving for a holiday or a new car, or perhaps even a deposit on a first home, while long-term goals might involve retirement. Understanding these distinctions can help you allocate your resources most effectively.

2. Learn About Risk Tolerance

Many of us think we can handle risk until we’re faced with actual losses.

How would you feel if you knew your investment had lost $1,000 worth of value in a day? Or $10,000? What about $100,000? How about $1,000,000? Only when you experience these numbers will your true investment risk tolerance be revealed. You might discover that you’re more risk-averse than you thought, which can help you adjust your investment approach. Understanding how much risk you can comfortably handle will lead to better decision-making in the future.

Consider taking a risk assessment quiz or speak with a financial adviser, including the team here at Become Wealth, to gauge your risk tolerance.

Adjust Your Portfolio

Once you understand your risk tolerance, you can structure your portfolio accordingly. Though ideally, this would be worked through during the good times, well ahead of any market crash!

In broad terms, if you find that you prefer a more conservative approach, consider reallocating your investments to include more stable assets, such as bonds or dividend-paying stocks.

3. Diversification is Key

If you’ve put all your eggs in one basket, a market crash might be a harsh lesson. It’s a reminder of the importance of diversification. By spreading your investments across different asset classes — like shares (stocks), bonds, and property — you can cushion the blow when one area takes a hit. This not only protects your wealth, making you financially more resilient, but it can open up new investment opportunities.

Investment Knowledge

Familiarise yourself with the major five asset classes:

1. Stocks
2. Bonds
3. Real estate (property)
4. Commodities, including gold
5. Cash

Each have their own characteristics and come with different risks and returns. The more you learn about them, the more you’ll be able to maximise the advantages of each and protect against their respective disadvantages, too.

Practical Steps to Diversify

Consider investing in managed funds or exchange-traded funds (ETFs).  These funds typically hold a variety of stocks, providing instant diversification. Additionally, investigate real estate investment trusts (REITs) for exposure to property without the need to buy individual pieces of physical real estate.

The Appeal of Real Estate

Investing in real estate can be particularly appealing in New Zealand, where property usually appreciates over time, lending (borrowing to invest) is simpler than with other assets, and there’s no capital gains tax.

4. Explore Alternative Investments

The term alternative investments is used to describe a broad array of other assets.

Usually, it’s wise to avoid alternative investments, but it wouldn’t be fair if we didn’t mention them at all. This category might include assets such as:

• Cryptocurrency
• Artwork
• Antiques, rare coins, collectible cars, or similar
• Hedge funds
• Peer to peer lending, and similar

5. Build Better Financial Habits

For some, a stock market crash can be a financial wake-up call. You might start tracking your spending more closely, take financial matters more seriously, or set about sticking to a budget. This newfound awareness can lead to better financial habits that stick long after the market recovers.

Creating a Budget

We get it, budgeting is hardly a sexy topic. But unless you’re telling every dollar you receive where to go, you’re destined for trouble.

If you haven’t already, create a simple budget that outlines your income and expenses. This will help you identify areas where you can cut back and save more. There are plenty of budgeting apps available that can make this process easier.

Save for Emergencies

Consider setting up an emergency fund to cover unexpected expenses. Aim for three to six months’ worth of living expenses. This safety net can provide peace of mind during market downturns and help you avoid dipping into your investments.

6. Find New Income Streams

Sometimes, a downturn can push you to think creatively about your income. Perhaps it’s time to start that side hustle you’ve been dreaming about or invest in your skills to boost your earning potential.

Many successful businesses have been born out of necessity during tough economic times.

Identify Your Skills

Take stock of your skills and interests. What are you passionate about? Whether it’s crafting, writing, dog walking, or consulting, there are countless opportunities to turn your hobbies into income streams.

7. Embrace a Long-Term Perspective

Stock market crashes can be unsettling, but they also remind us that investing is a long-term game. Historically, markets have recovered from downturns, often coming back stronger. This perspective can help you stay calm during turbulent times and encourage you to stick to your investment plans rather than making impulsive decisions.

Historical Context

Look at historical data to see how markets have performed over time. Understanding that downturns are a natural part of the economic cycle can help you maintain a long-term view.

Much of this relates to an earlier point about building your investment knowledge. The more you know, the more you’ll be able to make the most of opportunities that come your way. 

Stay the Course

During a crash, it’s tempting to sell off your investments to avoid further losses. However, staying the course and holding onto your investments can often lead to recovery and growth when the market rebounds.

8. Strengthen Your Resilience

Facing financial setbacks can be tough, but it also builds resilience. Learning to navigate through challenges can make you more adaptable and better prepared for future uncertainties. This resilience can extend beyond finances, positively impacting other areas of your life.

Develop a Growth Mindset

Adopting a growth mindset can help you view challenges as opportunities for learning and growth. Instead of seeing a market crash as a failure, consider it a chance to learn more about investing and improve your approach.

Here at Become Wealth, this is probably the most consistent thing we see among our high-performing clients.

Build Emotional Resilience

Financial stress can take a toll on your mental health. Practicing mindfulness and stress-reduction techniques can help you manage anxiety during turbulent times. Consider activities like yoga, meditation, or simply taking a walk in nature to clear your mind.

9. Connect with Others

During a market downturn, you might find yourself seeking advice or support from friends, family, or financial advisers – including us here at Become Wealth. This can lead to valuable discussions about financial matters including investing, sometimes helping you learn in ways that are far more impactful than reading or watching material online.

10. Reassess Your Investment Approach

A topsy-turvy market can serve as a fresh start. Take the time to carefully evaluate your current investment approach. Are there areas where you can improve? Perhaps it’s time to explore:

• Investing more, or less! This can include reassessing your KiwiSaver contribution rate.
• Keeping a little more set aside as cash, so you can make the most of opportunities such as a drop in the markets.
• Changing the mix of assets you invest into. This includes reassessing your KiwiSaver fund choice.
• Sustainable investing in ways which align with your values.
• Paying off debt rather than investing or taking on debt so you can invest more!

11. Take The Opportunity to Invest More!

We saved the best until last.

When prices plummet, many high-quality investment assets become undervalued, allowing investors to purchase those assets at what can be a significant discount. This phenomenon, often referred to as "buying the dip," can lead to substantial long-term gains when the market eventually rebounds. Historically, major markets such as the US stock market (usually measured by the performance of the S&P 500 index) have shown resilience, recovering from downturns and consistently proceeding to new highs.

By investing during a crash, you position yourself to benefit from the recovery, multiplying your initial investment as the economy stabilises and the assets you purchased at bargain prices are reassessed in time.

The Bottom Line: Stock Market Crashes Come with Benefits

While stock market crashes might be daunting, they also offer a chance for growth and reflection. By embracing the lessons learned during these downturns, you can emerge stronger and more financially savvy.

Every setback can be a setup for a comeback!

Investing is a journey filled with ups and downs. By building your financial know-how, remaining adaptable, and maintaining a long-term perspective, you can navigate the challenges that come your way. Embrace the lessons that market crashes teach us and use them as stepping stones toward a more secure financial future. Soon, you might even look forward to the downtimes as you’ll be better positioned than everyone else!

To set yourself up for the next stock market crash, which is only a matter of time away, feel free to book a complimentary initial consultation with one of our financial advisers. Your future self will thank you for it.