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I think it’s fair to say that things are looking a bit wobbly in the world of stock market investing. Conflicts, trade wars and other geopolitical issues have hit the global economy hard, shaking investor confidence.
During these times, it’s important to stay calm and seek out hidden opportunities. Market downturns are an inevitable part of the economic cycle, so responding in the right way can make a significant difference. Avoiding common pitfalls is essential to preserving capital and potentially securing future gains.
Here are the top three mistakes to avoid if the stock market crashes.
Panic-selling
One of the most frequent and damaging mistakes investors make during a stock market crash is selling off investments in a panic. Sharp declines can trigger emotional reactions, especially when portfolios lose significant value in a short space of time. However, selling during a downturn often locks in losses, preventing investors from benefiting when the market inevitably recovers.
History’s shown that markets are cyclical. Those who remain invested typically fare better over the long term than those who attempt to time the market. A more prudent approach involves reassessing risk tolerance and ensuring that investments align with long-term financial goals.
Failing to diversify
Diversification‘s critical to avoid being too exposed to a single region, sector or asset class. This can lead to serious losses during a market downturn. For example, if an investor holds a portfolio heavily concentrated in growth stocks or a specific sector like tech, the impact of a crash could be devastating.
Diversification remains a fundamental principle of sound investing. By spreading exposure across those different sectors, regions and asset classes, investors can mitigate risk and reduce the impact of a crash.
Ignoring defensive stocks
During a stock market crash, not all stocks are affected equally. Some companies are considered highly ‘defensive’ because they provide essential goods and services. They tend to perform relatively well as demand for their products remains stable, even during downturns. Ignoring these stocks can be a missed opportunity to stabilise a portfolio and reduce volatility.
One stock to consider
One notable example to think about is the FTSE 100 stock AstraZeneca (LSE: AZN), a global pharmaceutical leader and the largest public company in the UK. Due to a diversified pipeline of products and a strong presence in oncology and biopharmaceuticals, it offers a level of resilience uncommon in more cyclical sectors.
In 2024, revenue increased 14.8% to £43.2bn and operating income grew by a massive 32.3%. To honour the performance, it increased dividends by 5%, bringing them up to £2.46 per share — equating to a yield of 2.35%.
But there are risks to consider, not least of which involve allegations by China relating to unlicensed imports and unpaid tax. The claims prompted US shareholders to launch a class action lawsuit against the company. The eventual outcome of these issues could seriously hurt the share price.
Still, demand for healthcare products tends to remain high regardless of economic conditions, making AstraZeneca a solid defensive choice during turbulent economic periods. Its consistent dividend policy and global reach further enhance its appeal for risk-averse investors.
