Instinctually, we have a flight, fight, or freeze reaction to danger. Modern dangers do not often include predators trying to eat us; however, many of us suffer from a different sort of “danger” – losing our money. When the market crashed in March of 2020 by 34%, people demonstrated these three reactions. Some people sold at the bottom fearing that they may lose all of their money, others purchased more seeing an opportunity to buy at a discount, and others still did nothing and trusted their investment strategy.
People who sell during a downturn are exemplifying the flight response. In finance, this phenomenon is called “flight-to-safety” or “flight-to-quality.”
Flight to quality occurs when investors in aggregate begin to shift their asset allocation away from riskier investments and into safer ones, for instance out of stocks and into bonds. Uncertainty in the financial or international markets usually causes this herd-like behavior. However, at other times, the move may be an instance of individual or smaller groups of investors cutting back on the more volatile investments for conservative ones.https://www.investopedia.com/terms/f/flighttoquality.asp
Traditionally, people fled from perceived risky investments (i.e. stocks) to gold, money market accounts, and government securities. Now, we add a new factor into the equation – Crypto.
Some advertised Crypto as digital gold designed to be an inflation hedge and fluctuate independently from traditional markets; however, faced with inflation and the largest weekly fall in the Nasdaq since March 2020, Crypto is also crashing. So far Crypto has erased over $1 Trillion in value. Bitcoin is down to around half of its all-time high of $68,000 in November 2021, only two months ago. When faced with the danger of a market crash people are fleeing to safety, which is done by selling riskier investments like Crypto and stocks.
So what should you do now? Timing the market is not a good idea, typically. No one knows if the market will recover tomorrow, next week, next year, or never. Anyone claiming to know what the market will do is trying to sell you something.
You have three options to how to handle this market crash: (1) panic and sell fearing that the crash will continue, (2) stick to your investment plan and continue investing over time at the same rate, or (3) invest while the market is down.
Personally, I recommend a combination of 2 and 3. The first option is a great way to lose a lot of money and is the Wall Street Bets approach of “Buy High, Sell Low.” The second option is objectively the best approach: create an investment thesis, set goals, and stick to your plan to achieve those goals regardless of the market (“dollar-cost averaging”). The third option is a good supplement to the second option. While timing the market is a great way to miss out on potential gains, during market crashes and corrections many stocks may actually be on “sale.” Sometimes stocks will be pulled down due to people selling securities out of fear, which creates a good value purchase of a company.
With Crypto, the equation is more complex right now, because it is not just the technology stocks crashing that is causing this crash. There are major regulatory concerns internationally and domestically that are causing people to begin to question the future of certain of Crypto. Internationally, Russia, one of the leading countries in crypto mining, is proposing a ban on the use and mining of Crypto. This would be the second major country to do so after China’s ban last year. Currently, nine countries outright ban crypto and forty others heavily restricted its use by prohibiting banks from using it and banning cryptocurrency exchanges.
While the future is unknown, the current situation may present an opportunity to buy your favorite Crypto at a discount, lose money, or avoid the Flight or Fight and simply “Hodl” until things appear more optimistic. What will you do?
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