Did you check your investment account today and see a lot of red? It hurts to see your hard-earned money shrink. Your first instinct might be to pause your investments until things get better. But if you are using a Systematic Investment Plan, a stock market crash is actually your best friend.
Many people do not understand how a Systematic Investment Plan works during a bad market. They feel fear and stop their monthly transfers. This is usually the worst move you can make. Let us look at why a market drop is actually a great chance to build your wealth.
What Happens to Your Systematic Investment Plan in a Crash?
When you set up a Systematic Investment Plan, you invest a fixed amount of money every month. Let us say you invest one hundred dollars every month into a fund. When the market is high, your hundred dollars buys fewer units of that fund. When the market crashes, that same hundred dollars buys many more units.
Think of it like buying your favorite shoes on sale. If the shoes normally cost one hundred dollars, you can only buy one pair. If they go on sale for fifty dollars, you can buy two pairs for the same price. A market crash is just a giant sale on investments. Your monthly plan automatically buys more when prices are cheap.
This process is called cost averaging. Over time, this lowers the average cost of all your investments. You can find more helpful wealth advice and tech and finance tips on our blog to keep your budget on track. When the market eventually goes back up, you will own more units, and your profits can grow faster.
Why Pausing Your Monthly Investment Hurts You
It is natural to feel scared when the news says the economy is in trouble. You might think it is smart to wait until the market stops falling before you invest again. The problem is that nobody knows when the market will hit the bottom. If you wait, you will probably miss the best days to buy.
History shows us that the stock market always recovers. If you stop your monthly plan, you miss out on buying cheap shares. You only buy when prices are high again. This defeats the whole purpose of your plan. You want to buy low and sell high, not the other way around.
Think about the long term. If you do not need this money for ten years, today's drop is just a tiny bump on the road. Pausing your plan locks in your fear instead of locking in cheap prices.
How to Stay Calm When Your Portfolio Drops
It is easy to say "stay calm," but it is hard to do. When your phone sends you alerts about a market crash, your heart rate goes up. How do you keep your hands off the pause button? Here are a few simple tips to help you stay on track.
- Stop checking your balance every day. If you are investing for the long term, daily moves do not matter. Check your account once every few months instead.
- Turn off financial news. Cable news channels need views. They make every drop sound like the end of the world to keep you watching.
- Remember your goals. Are you saving for a house or retirement? Those goals are years away. This temporary drop will not stop you if you keep going.
- Read more about investing basics. Knowledge is the best cure for fear. You can read our guide on mutual funds to understand what you actually own.
Should You Invest Extra Money During a Crash?
If you have some extra cash sitting in a bank account, a market crash can be an amazing opportunity. You can put a lump sum into your fund on top of your regular monthly plan. This is like getting an extra discount at the store.
Only do this if you have a safe emergency fund first. Never use money you might need in the next year to buy stocks. You do not want to sell your investments at a loss because you need cash for rent. If your emergency fund is full, adding extra money during a dip can give your wealth a big boost later.
Keep Your Eyes on the Prize
A Systematic Investment Plan works best when you let it run on autopilot. It takes the emotion out of investing. You do not have to guess when to buy or sell. The plan does the hard work for you.
Next time you see bad news about the stock market, take a deep breath. Remind yourself that your monthly plan is busy buying cheap units. Trust the process and let your money grow over time. What is your plan for the next market dip? Will you keep your investments running?
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