We all know the drastic damage made by the 2008 great recession and financial crisis where a majority of the investors lost a huge pile of profits and even some lost all the investments. This crisis pushed the investors to the extreme where their emotions pushed them to make irrational decisions which made the situation even uglier. However, in this tough time there was few investors who took this massive selloff as an opportunity to for investment, these patient and highly skilled investors saw this opportunity created by the panicked investors who soled highly valuable assets at a very cheap price and this is where these methodical investors got their gems at a very cheap price.
This fact that money can be made in the time of crisis also motivated many investors to start Investing at the time of crisis which is no doubt risky but on the other side it gives a huge opportunity to the investor to steel profits out of the market at a very short burst.
In this blog we will discuss the effects of a financial crisis and how an investor can use these highly powerful market sentiment to create a fortune out of the market with a systematic and sensible investment strategy by keeping the risk associated with a crises under a certain limits to ensure profitability of the investment without succumbing to irrational fear and anxiety.
How normal Investors behaves at the time of a financial Crises
The financial market generally does not behave as per the predictions of the general investor population who uses traditional financial theory, in which it is believed that each individual investor always behaves rationally to maximize the profitability of the portfolio. Rather, the general population of investors often behave irrationally and let their emotions take over there investment decisions, especially at the time of an economic crisis investors usually behave irrationally and let the fear take over the investment decision which tends to result in a losing trade and investment. This is where the behavioral finance comes into the picture which focuses on finding the actual reaction and system of the response of the investors in different market conditions.
Behavioral finance is a focused study which shows that people, rather than being only risk-averse, are actually much more loss-averse. This states that people feel the emotional aspect of loosing and the pain of a loss more than the pleasure and happiness gained from an equal value of gains and profit. That means people tend to sell winning trade too early and to hold on to losing trades and investment for too long and this makes the time of financial crisis even more intense.
How to take Advantage of a Financial Crisis
While most investors are busy in selling their valuable assets at a very cheap price in panic selling there are few intelligent and strategic investors who take this movement as an opportunity to steal and bargain hunt valuable securities and see the resulting low prices as a buying opportunity. Buying assets from a panicked investor who sells because of fear created in the market at the time of a financial crisis.
These fearful investors usually neglect the fundamental or intrinsic values of the securities which results in a rewarding decision for a patient investors who allow prices to revert to their expected levels and get profits out of the market. Profiting from investing in a financial crisis requires discipline investment and trading, patience, and good liquidity to make opportunistic purchases.
The Bottom Line
Financial crises happened time to time in the past and created lots of opportunity for patient investors. Recessions and depressions occurred in the late 20th century alone and there were around twenty crises which can be identified by the market which had created lots of opportunity for traders. These financial crises showed the importance of Behavioral finance and tell us that people behave very differently at the time of crisis and make irrational investment and trading decision due to panic in such events, and tends not to act rationally which is the way traditional financial theory predicts.
As a result, those traders who keep calm and trade with discipline, and take this fall as an opportunity by understanding that, historically, markets have always rebounded from every financial crisis in the past will purchase assets at cheap prices and earn huge profits out of the market and increases the overall portfolio returns. Those with the broad mindset that a crisis gives huge scope to work the short strategies to profit from a falling market due to panic selling tends to make fortune from the market at the time of crisis just by keeping a open mind and patience and keeping a strict control on timing and buy and hold or short sell at a perfect price results in a huge profit for the investors.