Last Thursday (August 4th) was another black day on the stock market. In fact, it was the worst day on the stock market since 2008. Here’s how bad it was:
Dow Jones lost 512.76 points (-4.31%)
S&P500 lost 60.27 points (-4.78%)
Nasdaq lost 136.68 points (-5.08%)
TSX lost 435.90 points (-3.40%)
This is the perfect example of a “flash crash”; a stock market crash of 3, 4 even 5% in a single day. This was almost the norm back in 2008 when volatility was at its peak. Since then, we haven’t seen this happening too often. With all the Government debt problems around the world, chances are we are going to see a few more flash crashes.
So what you should do during a stock market flash crash?
#1 Cancel your stop loss orders
Stop loss orders are very useful if you don’t have time to follow the market on a daily basis and you want to avoid bad news related to one of your stocks that could affect its value in a short period of time (as was the case with RIM and YLO not so long ago). However, when the market plunges that fast, all your stocks will drown in the same rotten pool of bad stocks. So regardless if one company could be affected or not by the economic news; it will drop during a flash crash. The problem is that you could end-up selling a few stocks for nothing because you have stop loss orders that are too close to the stock price. The Stock market has a frustrating habit of rising not so long ago after a flash crash. Therefore, you will probably end-up selling your stock at a low price for a poor reason and buying it back at a higher price a few days later. This doesn’t sound like a great investing strategy!
#2 Ask questions; then shoot
Don’t try to play the cowboy here. If you sell your stock in panic mode, all you do is contribute to the mass effect and lose money at the same time. This won’t be of any use for both your own portfolio yield or the stock market in general!
You should do some research; try to understand what are the causes of the flash crash. I’ll bet 99% of the time, the cause is related to fear. Then you need to assess this fear and see how it could directly affect your dividend holdings. If you have stocks that are directly impacted and you can determine that the news announced was really something that was not factored into the price, you may want to sell.
#3 Cost Average!
By doing systematic investments or injecting timely liquidity in the stock market after a flash crash, you can certainly improve your overall yield. I’ve already mentioned that it is hard to time the market, but if you have some cash lying around and have some stocks on your radar, you can shoot faster than a sharpshooter and pick up great stocks at low prices. It’s like going to Walmart on Black Friday!
#4 Aim for Dividend Stocks
There is nothing better than a market crash to buy solid dividend stocks! Why? Because you have the opportunity to buy a solid company with a low dividend payout ratio but, because it is affected by the mass panic, it will pay a high dividend yield! People will still drink Coke (KO) during the recession and you now have an opportunity to buy it at almost a 3% dividend yield! Considering the company is doubling its dividend every 6-7 years, you will end-up with a 6-7% dividend stock within the next 10 years! This is a great opportunity! All you do is to aim for solid companies with key dividend ratios.
You can learn more about dividend investing by downloading my FREE Dividend Investing eBook!
DGB,
I completely agree that you should add to your positions when the market tanks if you have the capital available.
I recently made 4 new purchases of my own that I plan on writing about over the next several weeks. Only problem is that the market is still dropping as we speak! 🙂 Good thing I don’t plan on selling for quite awhile.
Take care,
DivPartisan
@DivPartisan,
I know your feeling, I just bought Coke (KO) and Telus (T on TSE) just before the market goes bust… at least, it’s a long term investment!
I had cash laying in wait as well. I thought i got a deal Thursday saving 3-4%. Now look at today :(. Who would have thought? I will keep buying into this drop. I’m not going to wait as long as I did on the last sale in 2008-2009. You can get more shares/units = more dividends, and then the stock will eventually come back from these low’s so it’s a double win.
Are you crazy?? Aim for dividend stocks? Dividends will get cut so fast, your heads will be spinning. When the markets flash crash, it means that you should pay more attention to what caused the crash.
@Tony,
so I guess you suggest to sell everything and buy gold? or even better, put your money under your pillow?
dividend from Coke, Johnson & Johnson, PepsiCo or Canadian Banks will get cut? tell me when it happens and I want to see how companies which just increase their dividends are going to cut them down in the next quarter due to some people panicking on the stock market!
Good stuff! I couldn’t agree more. There are some truly fantastic buys out there right now. Aflac trading for below $38 a share. Coke is nearing a 3% yield and ConocoPhillips is over 4%. This is a great time for a long-term dividend growth investor like myself.
I feel like I’m at a all-you-can-eat buffett with an empty stomach!
@Tony,
I tend to disagree with you and agree more with DGB. Everyone is suggesting safe, blue chip, DIVIDEND paying companies. What are your suggestions?
DP
@ Tony,
This video says exactly the opposite of what you’re saying..
http://www.morningstar.com/cover/videocenter.aspx?id=390854
Nice post Mike.
I was thinking of writing something similar on my blog. Now I’ll have to wait 🙂
Hold the line, maybe limp in slowly with more dividend-payers. I don’t think we’ve seen the worst yet.
DJIA close on Aug. 9, 2010 = 10,698.75.
DJIA close on Aug. 8, 2011 = 10,809.85.
The real panic for some won’t set until it drops below 10,000 this fall 🙂 Then, time to buy those equities.
I couldn’t agree more in that solid dividend-paying stocks is the place to be as we see the roller-coaster going into high gear.
Over the past couple of weeks, I’ve been nibbling in and making positions such as CM (close to 5% yield) and today I picked up 50 shares of WMT (at roughly 3% yield).
I’m not even going to attempt to time where the market is heading and guess where the bottom is going to be, but if the markets tumble further, I’ll be looking for even more bargains.
The TSX hit 7500 points in March 2009. I agree with MOA…when we see sub-10,000 levels, there could be a mass psychological affect with investors and a huge sell off could ensue…..and with it, more bargains!
Nice post!
Hi Mike! Great blog- thanks for the info and the work you put in!
I’m thinking of picking up some National Bank (TSX: NA) and/or TC PIpelines (NAsdaqGS:TCLP). I like the solid dividends and the recent decline in share price compared to other solid dividend companies has got me thinking of share price upside potential as well. Any thoughts on these two or other solid dividend companies that have some share price upside potential?
@Tony – good point – current conditions make investing right now very risky. My approach has been to nibble each day, and stay disciplined as to the amount I invest (just small amounts for me) and making sure that I do buy something each day we have major declines. I try to mitigate the dividend cutting risk by investing in companies with low payout ratios and a history of not cuttingdividends during the crash of 2008/9.
First of all, I hate stop orders as a general rule and use put options instead. I control when they are exercised so I can sit back and watch the carnage unfold without making any hasty moves.
Second, I do think dividend stocks can be useful in such a market provided that they are solid businesses and have survived recessions before. You don’t want to aim for yield and end up hitting GM before its bankruptcy.
@Peter,
I can’t agree more about NA… love this stock! 😉
I completely agree. This was a good chance to pick up some cheap buys. i increased my position in RY and picked up shares in CF at nearly a 30% discount – awesome stuff.