Stocks fell so fast today - 7% in less than an hour after markets opened - trading was halted for 15 minutes. To many outside observers, that might look like the stock market crashed, but a trading halt is actually designed to prevent a market crash.
A stock market crash is when stocks drop 10% or more in two trading days. We aren't there yet. The S&P 500 is down 6.8% since Thursday's close. But that doesn't mean there's no cause for concern.
Stocks are down over 16.8% from their February highs, which is officially a stock market correction. If stocks hit the 20% mark from highs, then we'll officially enter a bear market.
Of course, if you've watched your 401(k) and retirement accounts lose 17% of their value in a matter of days, you don't care what the experts call it.
What you do next is the most important factor here - not whether this is officially a stock market crash or not.
We know this is a time of uncertainty. Watching your money evaporate is nauseating.
Fortunately, you are in control.
Here are three things you can do right now to protect yourself and set up your portfolio for the rebound...
What to Do When the Stock Market Crashes
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First, know that now isn't the time to sell. It might be your first instinct when stocks plunge. You think you can stem the bleeding by getting out. The problem is you might get out at the bottom and be forced to buy back in at a higher price. That can multiply your losses.
If you're retiring soon, just retired, or needed to cash out soon, it's best to consult a fiduciary financial advisor who can give you personalized advice.
If you don't need money immediately, then the best idea is to keep your stocks.
Second, if you're investing for the long haul, you actually want to increase your exposure to stocks right now. With stock prices dropping, this is your chance to buy in at prices you thought you missed on the way up.
You might want to add funds to your tax-deferred retirement accounts, like your 401(k), especially if you have an opportunity to get employer-matching contributions.
It's also a good time to rebalance your portfolio. If you've been maintaining an 80-20 stock to bond allocation, it's likely out of whack right now. Your bonds are worth more, and your stocks are worth less. Take an hour or so to figure out how much of your bonds to sell to maintain your allocation, then put the proceeds back into your stocks.
One of the best ways to do that is with a lowball order. This is where you submit a Good-Til-Canceled limit order at a price 10% or 20% below the stock's current trading price. Make a list of stocks you wished you owned but thought were too expensive and submit these lowball orders. If they fill, then you've amplified your potential returns.
Third, an immediate solution is to add hedges like gold.
Gold is a safe-haven asset. Investors flock to it when stocks fall. Adding a hedge like gold can offer you stability in times like these.
We like the SPDR Gold Trust ETF (NYSEArca: GLD) as an easy way to own gold without dealing with the hassle of securing gold coins or bars. GLD is up 9% on the year, while stocks are flirting with bear market territory. If the uncertainty continues, expect gold to continue performing well.
Action to Take: Don't panic and sell your portfolio. That could cost you in the long run. Consider rebalancing and making some lowball orders on your stock wish list. And you can add a hedge like gold to help smooth out short-term volatility.
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