How to Profit from a Stock Market Crash
According to Standard and Poor’s, the S&P 500 is down 40.29% for the year. And just in case you thought that was a typo, I’ll repeat myself: the S&P 500 is down forty point twenty-nine percent so far in 2008. Ouch! Now here is something that is far more important. How you handle your stock market.
In the short term, stock prices reflect all kinds of noise. The Fed Chairman says this or that, and stocks fluctuate. Unemployment numbers come out, and the market reacts. A politician says something to get elected, and the stock market traders do their thing. The point is that in the short term (I’d say 1 year or less), stock prices are often the result of factors that do not bear on the long-term value of the enterprise.
In other words, the investing decisions you make during a market crash will impact your investment returns forever. And, if you make the right decisions in a falling market, you can profit handsomely. The fact is, however, that many people lose money (and lots of it) during a stock market crash, but it does not have to be so. So lets take a look at what’s going on here, and how we can profit during this (and any) down market.
When viewed long term, however, the market truly does reflect the underlying value of public companies. By long term I mean really long term (10 years or more). Stocks can be undervalued or overvalued for a decade (see 1960s or 1990s). But given enough time, stocks will reflect the underlying value of the corporation that issued the security.