Fundamental investors have long warned of a big drop in share prices. The overvaluation on US stock markets was all too obvious. For a long time it was not clear what trigger the crash would have in the end.
The extremely expansionary monetary policy of the European and American central banks caused an increase in inflation from 2021, so now the institutes have to raise interest rates. You are a shock trigger. Especially stocks that had previously risen sharply and were overvalued have therefore fallen significantly since 2021.
Inflation as a factor triggering the crash
But now, as a result of the war between Russia and Ukraine, prices have increased even more. Therefore, inflation will remain very high in the short term. It not only taxes private households, but also many businesses. The result is likely to be a drop in earnings, which in turn will lead to a drop in share prices. Since Europe is financing the war with its imports of Russian energy, there are already calls to freeze purchases. The consequences would be even higher prices, likely raising interest rates significantly, and another drop in the stock market.
But as the DAX, MSCI World, Nasdaq and other stock indices are falling, investors shouldn’t look too bearish. Ultimately, the stock market is always looking for a reason for a drop when stocks are too expensive. Historically, this has always been the case and will not change in the future.
Stay true to the strategy in case of an accident
As investors, we either have to live with fluctuations or expand our portfolio by diversifying across different asset classes. Often it even helps to not watch or read any news and just stick to your own strategy. Investors should not rush into a frenzied buy or sell right now, but instead stick to their long-term plan.
For example, if you invest in ETFs once a year (not more often), you can ensure low prices. The market can probably drop significantly lower right now, but those who only shop once a year will also benefit from lower prices.
The market can also change quickly
On the other hand, nobody knows how long the war will last. A sudden peace could also lead to rapid change in the markets. So if we find individual stocks that have fallen sharply into the crash and are backed by valuable companies, we should seize the opportunity even if prices fall further. Here too, a spread over time could be useful, for example buying only once a year.
Caution is still warranted for US equities as the broader market continues to trade well above the region’s economic output. Therefore, the Nasdaq and S&P500 indices could only be at the beginning of their decline.
But after two or three weak years, stocks continue to rise again. So if you sow seeds in the weak courses, later you could bring a rich harvest.
The article Crash: Profit optimally from the crash of stocks, DAX, MSCI World and Nasdaq! first appeared in The Motley Fool Germany.
Motley Fool Germany 2022